This guide is for financial advisers only. It mustn’t be distributed to, or relied on by, customers. It is based on our understanding of legislation as at May 2023.
Discretionary beneficiaries
If no individual trust is in place on a member’s policy, scheme rules will generally provide that any lump sum death benefit is payable at the discretion of the scheme administrator/trustees. The scheme administrator/trustees will decide who is to receive the lump sum from the list of possible beneficiaries in the scheme rules.
Common beneficiaries are the member’s spouse, civil partner and other dependants or relatives but can also be charities, trusts and legal personal representatives.
Where the scheme administrators or trustees have the power to make a discretionary decision, the lump sum will not normally form part of the deceased member’s estate for Inheritance Tax (IHT) purposes. This applies whether the lump sum is paid to one or more beneficiaries, or to the estate. See ‘Inheritance tax (IHT)’ for more information.
Scheme rules may allow the member to nominate, in writing, who they would like to receive the lump sum death benefit. This request, sometimes referred to as an ‘expression of wish’ or ‘death benefit nomination’, is not legally binding on the scheme administrator or trustees.
Individuals who complete an expression of wish should review it from time to time, to consider any changes in their personal circumstances (for example, marriage or divorce, the birth of another child or the death of an existing nominee). Benefits paid to individuals nominated in an expression of wish form will not normally form part of the deceased member’s estate for Inheritance Tax (IHT) purposes.
Scheme rules may alternatively (or additionally) allow the member to nominate, in writing, who they want to receive the lump sum death benefit. This request is legally binding on the scheme administrator or trustees. With these binding nominations, the lump sum death benefit will form part of the estate and therefore may be subject to IHT.
It’s worth noting that pension contracts in the member’s own name – e.g. section 32 (buyout) policies, section 226 retirement annuity contracts and policies assigned from occupational pension schemes – generally pay any lump sum death benefit directly to the member’s estate. As a result, the death benefit would be considered for IHT. This can be avoided if the contract is placed in trust.