A duty of care and some common sense

by

THU, 15 MAR 2018

You will in all likelihood have seen the headlines in some of the Sunday papers and in the financial press at the end of last month stating that three quarters of a million people coming up to retirement were at risk of their pension being passed on to an ex-partner when they die because they had not updated their expression of wish.

Now, at the very outset I am not disputing the importance of a member keeping their expression of wish up to date and this is for two key reasons. First of all it gives guidance to the pension provider as to whom the member wishes to benefit, and secondly the introduction of pension freedoms now allows for the option of the beneficiary receiving a pension rather than a lump sum.

The amount of money involved can be considerable and members should always be encouraged to review who they would like to benefit, particularly when their circumstances change. In reality though many complete an expression of wish at the time they became a member of the scheme and never think to update it. However, to imply that a pension provider will act merely on the guidance provided through an expression of wish is to say the least reckless.

Not all, but the majority of pension schemes give the scheme administrators/trustee discretion as to whom they pay death benefits to. It’s a big responsibility and not taken lightly. For it to be effective to avoid inheritance tax the pension provider has to be able to demonstrate it has used its discretion. Perhaps of more importance is that there is a duty of care on the administrators/ trustees to consider who they should pay the benefits to. As well as looking at the expression of wish the pension provider should enquire about the terms of the deceased’s will, if one has been made, obtain details of marriage status, children and other financial dependants. It is also not unrealistic to ask for evidence of financial dependency where the situation is uncertain.

Fortunately, in most circumstances it is fairly obvious, even without an expression of wish, who should benefit and a pension or lump sum can be paid out quickly with no fuss or challenge, but there are always exceptions.

For example, I have seen a case where the member had divorced. His ex-wife got the house and in return he got to keep his pension. He had been advised by his solicitor to change his expression of wish and he duly did so, nominating his two sons. A couple of years later he entered into a new relationship and had another son. Unfortunately he died in an accident and had little assets other than his pension. His ex-wife was not financially dependent on him and his sons from his marriage were in their late teens at the time of his death. Though his ex-wife fought vigorously to have all the pension proceeds paid to her sons, including the involvement of her solicitor, this decision was to pay a large proportion to the partner and the remainder split between his three sons.

In a similar scenario but with a different outcome, the member had re-married but had a daughter from his first marriage. He had nominated his daughter in his expression of wish and this had been dated prior to his second marriage. On his death his widow claimed the death benefits should be paid to her in full and her late husband had merely forgotten to update the expression of wish. However on investigation it became clear that it had always been his intention for his daughter to benefit from his pension and he had made other provisions for his wife. If the member had completed a new expression of wish after his second marriage keeping his daughter as potential beneficiary it would have speeded up the process but not changed the outcome.

So there is no doubt that an up to date expression of wish can make life easier in the decision making process, but it is only part of the equation with the need to demonstrate a duty of care and the requirement for some investigation and a bit of common sense being every bit as important.

Discretionary powers are not just there for tax purposes and pension providers should not be afraid to use them.

This blog first appeared in Professional Adviser

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