Avoiding death benefit discretion distress

Pension death benefits have featured heavily in the financial news since last Autumn’s Budget announcement that they are to be included in the deceased’s estate for inheritance tax (IHT) purposes from April 2027. Under current rules, pension death benefits are excluded from the estate, provided there is nothing that binds the scheme trustees to making payment to a specific beneficiary (or beneficiaries). If the trustees can exercise their discretion, then no IHT is due.

Given the impending change, the question has been raised of whether trustees will still want to have discretion over who receives death benefits when there is no longer a tax advantage associated with it.

Having binding nominations would make trustees’ jobs easier in many cases; no need to seek out potential beneficiaries, check for changes in circumstances, or assess relative needs, all whilst also considering members’ wishes.

However, there are a significant minority of cases where binding nominations would cause issues. We still see too many cases where the member’s circumstances have changed but their expression of wish hasn’t been updated. This could be on divorce, separation, new partners, new children and all kinds of complicated family arrangements. A binding nomination to an ex-partner would be unlikely to go down well if there’s a more recent partner, potentially with children involved.

Even when a relatively up-to-date expression of wishes is in place, complications can arise. When exercising their discretion, trustees must consider the needs of any dependants of the deceased. Spouses, civil partners and children under the age of 23 are automatically dependants. This means that if the member has made an expression of wish nominating other beneficiaries – for example adult children – the needs of the spouse should always be considered before death benefits are paid elsewhere. Usually this means the spouse would need to confirm they are financially secure without receiving the death benefits, and then the trustee would likely follow the expression of wish.

However, non-married partners could also be considered dependants. The most common scenario will be co-habiting partners. To be classed as a dependant, one partner does not have to be financially dependent on the other – a relationship of financial mutual dependence involving some element of reliance on each other is sufficient to qualify. This is harder to evidence than a marriage certificate, and questions will need to be asked about the nature of the financial relationship, and evidence sourced. Importantly these questions need to be asked even if the partner wasn’t nominated by the member – because if they are found to be dependent then their needs should be considered. And when you have strained relationships between children from one relationship and a partner who was the member’s companion in later years, competing representations can ensue.

If the member wants their death benefits to go to a non-married partner, nominating them removes the need for the partner to demonstrate dependence. But if, for whatever reason, they don’t want their partner to receive anything from the pension, they should be aware that they will likely still be asked questions and considered in order to determine if they are a dependant. The discretion process runs more smoothly when this is expected and the member’s wishes have been discussed between partners, and if the trustees understand the reasons for the member’s decision. Having open conversations and an understanding of the process can help reduce distress for all involved.