What dependant's pensions are payable?
On the death of a member a pension may be payable.In this section we will look at who may receive a pension and how much it may be.
HMRC definition of a dependant
HMRC define a dependant as someone who is:
1. Married or in a civil partnership with the deceased at the time of their death.
2. A child of the deceased member who at the date of death is:
a. under age 23 or;
b. over age 23 and, in the opinion of the scheme administrator, is dependent on the member due to physical or mental impairment.
3. None of the above but in the opinion of the scheme administrator, is financially dependent, mutually financially dependent, or dependent due to physical or mental impairment.
It is important to note that a stepchild cannot be treated as a dependant under definition 2 above unless the member had legally adopted them.
Scheme rules definition
The scheme rules may differ within the HMRC definition, for example:
Amount of scheme pension
The amount of pension paid to a dependant will depend on the scheme rules, it is often:
If the scheme is a defined benefit scheme:
To the spouse – 50% of the deceased member’s pension at date of death.
If the scheme was contracted-out the pension must be at least equal to 50% of the deceased member’s guaranteed minimum pension (GMP). If the spouse is a widower then this minimum relates to the GMP earned after 6 April 1988 only.
To children – this often totals 50% of the spouse’s pension.
The pension will increase in the same way as the deceased member’s pension increased.
If the scheme is a defined contribution scheme or money purchase arrangement
The dependants’ pensions will be based on the value of the member’s fund at the date of death and the age of the dependants. They must be given the right to choose the insurer and they can tailor it to their circumstances, such as whether or not it should remain level or increase, and the frequency of payments.Regardless of the scheme benefit basis:
As can be seen from the above setting the pension up may not be the end of the matter.
The dependant may have an obligation to inform the trustees or the insurer of any change in circumstances from time to time.
Trivial pensions
If the dependant’s pension is a small amount then very often they will have the option of commuting it for a one-off lump sum which discharges the scheme of all liability to further benefits.
The maximum amount that can be paid from a scheme £30,000 and the whole amount is taxed as pension income. The scheme administrator will deduct tax using PAYE and pay the net amount to the dependant.
The pension can be trivially commuted at outset or at a later date. There is no time limit for making this payment.
Commuting a small pension for a one-off lump sum saves the scheme on-going administration costs. However, is it beneficial for the dependant?
The dependant needs to consider how this may interact with any means-tested state benefits they may receive such as housing benefit or council tax. If a lump sum is taken it will increase their capital and therefore may impact on their eligibility to claim these benefits.
Similarly, additional capital may also reduce or extinguish entitlement to pension credit.
A dependant may wish to consider taking regulated financial advice before choosing to take a trivial lump sum instead of the pension.
State benefits
Provided the member paid the relevant national insurance contributions then the spouse or civil partner may receive the following benefits from the State.
Bereavement allowance
These are weekly taxable payments paid up to 52 weeks if the spouse or civil partner are aged between 45 and State Pension Age at the date of the member’s death; and they are not bringing up any children.
Bereavement payment
This is a one-off tax-free lump sum.
Widowed Parent’s allowance
This is a taxable benefit for those under State Pension Age with at least one child who qualifies for child benefit. It is also paid if the spouse or civil partner is expecting the member’s child at the date of death.
State pension
The Basic State Pension cannot be passed on to someone else when the member dies.
However, if this pension had been deferred to a later date then the spouse or civil partner may be able to claim some of the deferred amount.
The spouse or civil partner may be able to claim some of the deceased member’s additional state pension.
If the spouse or civil partner does not qualify for the full amount of the Basic State Pension in their own right they may be able to claim some of the deceased member’s qualifying years. If the spouse or civil partner is over State Pension Age they can check this with the Pension Service. If they are under State Pension Age then any pension they may inherit from the deceased member will be included when they claim their own state pension.
Under the new single tier State Pension which was introduced on 6 April 2016, there is no ability to inherit or derive rights from a spouse or civil partner.
Benefits for Minors
The family situation may mean that the lump sum death benefit from the pension scheme is destined for a young child who is classed as a minor.
If the money due to the minor is paid to a parent or guardian, issues for the trustees include:
Trustees have a duty to ensure that the money benefits those for whom it is intended.
Trusts for Minors
The Trustee Act 2000 for England & Wales, imposes a high level duty of care on any trustee. This means:
The scheme rules should be checked to ensure that payment can be made to another trust.
If the fund is small and will only run for a short period, the pension scheme trustees may set up and run the trust themselves.
For large sums of money or more complicated trusts the pension scheme trustees may prefer to use an external professional trustee company.
The benefit is paid to the professional trustee who liaises with the parent or guardian over the needs of the child.
The professional trustee invests the money, produces annual accounts and deals with all tax reporting and compliance. They make payments for educational or other purposes as necessary during the term of the trust.
Overpaid pensions
This occurs in two main circumstances:
Trustees have a duty to get the money back and will write to the child/estate requesting repayment of the overpaid amounts.
Concealment Fraud
This type of fraud occurs when an individual fails to notify the trustees or insurance company of a pensioner’s death and continues to receive the deceased pensioner’s benefits.
Some schemes will periodically perform a Certificate of Existence exercise where they send a form to all pensioners who must sign and return it to basically confirm that they are still alive. Some pensioners find this a strange request and may even complain but, as payments to deceased members are estimated to cost the UK £200 million per annum *, this type of fraud is a major concern to pension schemes.
(* source: Tracesmart)
Of course an individual could still fraudulently complete this form and forge the pensioner’s signature, consequently many schemes now employ agencies to perform regular checks on their behalf. The agencies use various methods to verify the recipient is still alive, they have access to the Register of Deaths and links with the Identity and Passport Service.
If a Member is Divorced
Any dependant’s pension depends on how the member’s benefits were treated at the time of divorce.
Attachment Order
The ex-spouse and member benefits are inter-dependent so quite often when the member dies the order lapses, so the ex-spouse could get nothing.
If the member was already in receipt of a pension the amount earmarked for the ex-spouse ceases as the member’s pension ceases.
If the member dies in service then any benefits will be paid as indicated on the attachment order.
Pension Sharing Order
There is no impact when the member dies as the ex-spouse’s benefits are independent.
The ex-spouse has pension benefits in their own right.
The benefits payable when the ex-spouse subsequently dies will depend on the terms of the scheme or contract that holds the ex-spouse’s benefits.
Flexible Drawdown
A pension scheme which provides money purchase benefits may offer flexible drawdown for the dependant’s pension.
This has no limit, the dependant may draw as much or as little as they like.
The dependant must not be an active member of a scheme in the tax year that they opt for flexible drawdown.
A child can also qualify to receive their pension as flexible drawdown. They can make contributions to a pension scheme in future years but all the contributions will be liable for the Annual Allowance Charge.
Pension Increase Exchange (PIE) Offer
The member may have agreed to a PIE offer before they died and this could mean that the dependant’s pension does not increase.
A dependant could also be offered a PIE from the trustees and before coming to a decision they will need to consider their health and life expectancy in the same way as for offers to other members.
