Death benefits – how trustees exercise discretion

Most defined contribution pension schemes don’t allow members to make binding nominations as to whom should receive any remaining pension funds on the member’s death.

The main advantage of allowing the trustees to exercise their discretion, is that it keeps the pension funds out of the deceased’s estate – so no inheritance tax is payable on the funds passed on. It also means that if a nomination has been made that is out of date, the trustees are not bound to follow it.

As part of our Bitesize Technical series, Senior Technical Consultant Lisa Webster looks at the factors the trustees consider when exercising this discretion.

Please note: These are the current rules for pension death benefits. Changes to the tax treatment are due to come into force from 6 April 2027.

Key insights on how trustees exercise discretion

What is the law relating to how trustees must exercise discretion?

The law is clear that trustees must consider all relevant matters and ignore those that are irrelevant. The law requires that the trustees reach a “reasonable” decision – specifically a decision "which is not so unreasonable that no reasonable body of trustees could have made it".

Can decisions be challenged?

Since 2015, when the rules regarding who can receive pension death benefits were relaxed, an increasing number of decisions have been challenged and taken to the Pensions Ombudsman.

Such challenges are only likely to be successful where the decision was clearly unreasonable, in which case the Ombudsman will generally direct the trustees to look at the decision again, rather than decreeing who should receive the death benefits.

What will the trustees consider?

Trustees will always consider any expression of wishes made by the member in their lifetime, and any dependants they have at the time of death.

Will the expression of wishes be followed?

Rather than simply relying on the expression of wishes, the trustees should ask relevant questions to establish if there are any dependants, or if the deceased’s relationship status has changed since the expression of wishes was made. It’s usual to consider the Will.

The Will cannot dictate what happens to the pension, but if potential beneficiaries are provided for elsewhere, it could become relevant.

The trustees can also ask the executors if there’s any other relevant information that they, or any potential beneficiary, wish to be considered.

Will a dependant always get the pension?

Whilst the trustees will always consider dependants, it doesn’t mean they will always receive the pension death benefits. In some instances, the dependant may not want or need the death benefits, and would rather they be paid elsewhere – most commonly to children.

The trustees may want to establish that the dependant is financially secure before they allocate funds away from them in favour of other non-dependant beneficiaries.

Can the trustees use their discretion to pay to someone who is not a dependant and was not nominated by the deceased member?

It is unusual, but the trustees can exercise their discretion to allocate death benefits to beneficiaries even if they were not nominated by the member. If they are not a dependant or nominee, the beneficiary would only have the option of taking the benefits as a lump sum payment, rather than keeping them in a pension to draw an income from when needed.

What can advisers do to smooth the process?

Getting the relevant information needed to make the decision on how death benefits should be distributed can take time. This is especially the case when the member’s circumstances have changed since their nomination, so keeping them up to date can make a big difference when the member dies.

More Bitesize Technical

Hungry for more? Watch ‘Inheritance tax and pensions, explained’ – the next instalment of our pension death benefits Bitesize Technical series.