What is the procedure for death in service?
We will now consider the normal procedure when an active member of a pension scheme dies. It is an upsetting and confusing time for the family so it will help them to understand what is required.
It is important that death cases should be given a high priority and dealt with by everyone as quickly as possible and in a sensitive manner.
1. Notification
A notification of death form is normally sent in by the employer or a family member may telephone the pension administrator or pension provider directly.
The original death certificate must be obtained and in some cases this will need to be passed onto other parties in connection with the scheme benefits due, consequently it may not be possible to return the death certificate immediately.
The scheme administrator should also obtain the expression of wish form – this may be held by the administrator or the trustees, and may be in a sealed envelope marked "only to be opened on death”.
Although members are encouraged to complete these forms and keep them up to date, one is not always available.
Other information that is required to help the trustees settle the benefits is:
Spouse, civil partner or partner
Name, address, date of birth and their certificates. If it is not a legally recognised partnership then it would be helpful for the trustees to know the duration of the relationship.
Children under age 23
Names, dates of birth, marital status, address and if they are in full time education.
Other dependants or relatives
Names, address, dates of birth, relationship to the deceased and if they were financially supported by the member.
Legal Personal Representative
If one exists – the name, address and relationship to the deceased.
Probate Information
If available, a copy of the Will or Grant of Probate/Letters of Administration. In Scotland probate is called "confirmation”.
2. Calculation of Benefits
The benefits will be calculated in accordance with the scheme rules and the information sent to the trustees along with the expression of wish form (if they don’t already hold it and if one exists) and any other information that has been made available from the family.
If the member paid AVCs or has defined contribution benefits the amounts will be provisional as the actual amount will not be known until the benefits are realised.
Where benefits are payable at the discretion of the trustees such as the lump sum – no details should be given to anyone without the agreement of the trustees.
3. Obtaining monies
Whilst the trustees are making their decision the monies due should be realised and paid into the trustees’ bank account, for example:
4. Trustees’ discretion
Pension scheme trustees must always act in the best interests of the scheme beneficiaries who include anyone who is entitled to, or might receive a benefit from the scheme either now or in the future.
In the case of a member’s death this relates to:
The trustees decide who should receive the lump sum payment, as this is a discretionary payment it does not form part of the deceased member’s estate and is free of tax.
Trustees will also decide who should receive any dependant’s pension in accordance with the scheme rules.
Trustees must also consider the beneficiaries’ interests and act impartially, this includes taking account of all the relevant facts and weighing up the interests of each individual against the needs of the others. Professional advice should be taken if necessary and all decisions should be recorded.
In certain circumstances the trustees may release monies to pay for funeral expenses in advance of a decision as to the beneficiaries of the death lump sum. Any expenses paid in advance will then be deducted from the final payment.
5. Settling benefits
The dependants’ pensions should be set up as soon as possible after the death of the member.
Once the trustees make their decision the lump sum benefits can also be paid out as per their instructions. Again this should be done as quickly as possible as quite often the money is required to pay for funeral expenses.
If any dependant’s pension is not a fixed amount and if the monies are to be used to set up a dependant’s pension, then quotations may need to be obtained and the dependant may have the option of purchasing their own pension on the open market.
Disclosure Regulations
The disclosure regulations state how quickly people should be notified of benefits payable following the death of a member.
Time limit for payment of lump sum benefits
The lump sum death benefit must be paid within 2 years of the earlier of:
Payment made after 2 years
If the member was aged under 75 when he or she died and an uncrystallised funds lump sum death benefit is paid after the 2 year time limit has expired, the uncrystallised funds lump sum death benefit is subject to the recipient’s marginal rate of tax or, if not an individual, a special lump sum death benefit tax charge of 45%.
A defined benefit lump sum death benefit paid before 6 April 2016 after the 2 year time limit has expired will be an unauthorised payment and subject to unauthorised payment tax charges.
A defined benefit lump sum death benefit paid on or after 6 April 2016 after the 2 year time limit has expired benefit is subject to a special lump sum death benefit tax charge of 45%.
The recipient is responsible for any tax charge. HMRC will decide what portion of the tax bill each recipient will pay, it is apportioned equitably.
