Pensions & Life Cover

The benefits from a pension fund on retirement are usually straightforward. They will cease on your death or reduce with a benefit being payable to your spouse.

The position if you should die before retirement age is more complex and it is usual for a lump sum payment to be made, known as a death in service benefit. Although you can use a Will to gift the proceeds of a life assurance policy or pension plan, this is not possible if you have already named someone else to receive the proceeds. The member, usually when he/she first joins the scheme, will complete a form indicating whom he/she would like the trustees to pay the lump sum to. This is normally payable at the discretion of the trustees of the pension fund and for this reason is usually not brought into account when the Inheritance Tax calculation is made. It is for this reason that you cannot direct the trustees to make the payment to particular beneficiaries but merely record your wishes for them to take into account when they make their decision.

Most schemes provide for a Death in Service benefit, similar to a life assurance policy. A lump sum is paid to a beneficiary on the death of a member. The value of the lump sum is normally calculated as a multiple of the member's final earnings. The benefit can be paid free of tax if it is less than the member's available lifetime allowance.

“Lump sums are paid at the discretion of the scheme trustees. This is to exempt the beneficiaries from inheritance tax liabilities. The trustees have a duty to ensure that the lump sum is paid properly, taking into account the member's wishes and anyone that may have been financially dependent on the member when he died.”

Life assurance provides a simple and often cost effective way of providing funds to pay Inheritance Tax on your death. Although you can use a Will to gift the proceeds of a life assurance policy, this is not possible if you have already named someone else to receive the proceeds. If you are in any doubt as to who is to receive the proceeds from these items you should check with the insurer or broker who arranged the policy. The benefit created by such policies should be paid, under simple trust arrangements, to your children or main beneficiaries. This will ensure that the funds are not assessed for Inheritance Tax purposes. The trust provisions will operate outside your Will and should not be referred to in the Will.