You’ve got a dependant in me

If there are two things we know to be complicated; they are pensions and relationships.

The marriage rate is falling. Divorce is on the rise. People are living longer lives (and spending a greater proportion of those lives living with their parents). The concept of a blended family rightfully sits alongside traditional notions of a family and the obligatory ‘two point something’ children.

While dependency in its truest sense has not changed, after all – people need people, the legal and societal structures around it have. From a pension scheme trustee’s perspective, this can make deciding upon discretionary pension benefits payable upon the death of a member more challenging than ever.

So I’ve set out some top tips for navigating the more challenging cases. We do not cover discretionary lump sum death benefits which may be subject to different considerations.

Act only within the parameters of the scheme rules and the tax legislation

An individual can only receive a benefit from the scheme if:

• they are within the named class of potential beneficiaries under the rules of that scheme
• the tax legislation permits payment to be made to them on the basis of their relationship with the member.

Death benefit pensions from schemes are intended to benefit those in respect of whom the member had a personal relationship of dependence. They are not, for example, intended to offset a loss of profit suffered by the loss of a business partner or benefit a landlord who has lost a tenant.

Unlike a lump sum death benefit, which would most commonly be paid to the member’s estate if a specific appropriate beneficiary cannot be found, a spouse’s, child’s or dependant’s pension will not be paid if there is no eligible beneficiary.

Discretionary death benefit pension decisions should be evidence-based

The information gathering exercise is of vital importance to any discretionary death benefit decision. The more comprehensive the information, the better the quality of the decision making. A decision maker should enter into the process with an open mind and be guided by the evidence, as opposed to beginning with a view of what the ‘correct’ outcome might be.

In addition to standard-form questionnaires sent to prospective beneficiaries, decision makers may wish to obtain information from the member’s colleagues (in respect of active members) or conduct tracing.

If the beneficiary questionnaire used is not providing the information you need, consider amending it to make it more comprehensive, or including an explanation to the recipient on how important their input is to the process.

It can be hard to maintain an objective standpoint about a matter that is so emotional for those involved. Sometimes the parameters in which a decision-maker must act – for example, paying a benefit to an individual from whom the member was estranged or one family member in the face of fierce objection from another – may go against the decision-maker’s personal view of who should benefit.

At other times the information gathering process reveals information which may be upsetting to prospective beneficiaries – for example, an expressed wish by the member to not make provision for someone who would have expected to receive a benefit or the presence of a partner or child whom the member had kept secret.

In all such circumstances, it is important to separate relevant factors, such as the wishes of the deceased member, from irrelevant factors, such as the decision maker’s moral view on who may be deserving of a benefit.

Financial relationships can take many forms

Financial dependence is a common prerequisite for many discretionary death benefits – and is a key pillar of the requirements set out under the tax legislation for someone to be able to qualify as a ‘dependant’. A dependant in this sense means an individual, other than a spouse, civil partner or child, who may be eligible to receive a pension benefit upon the death of a member.

However, many trustees are quick to fall into the trap of viewing financial dependence as only being relevant where it is ‘one-sided’ – ie the prospective dependant was financially reliant upon the member – even where this is not stipulated by the scheme rules.

Under the tax legislation a “dependant” includes an individual (other than the member’s spouse, civil partner or child) who was, at the date of the member’s death, in a financial relationship of mutual dependence with the member.

In essence, this means that the member and the prospective dependant were mutually reliant upon one another to maintain a certain standard of living. Evidence may include co habitation, a joint bank account, joint utility bills or bank statements showing the sharing of household expenses.

Beware common pitfalls

The complexity of discretionary death benefit decisions is such that no two cases are the same.  We frequently see the following tricky areas arise in practice:

• Separated spouses. Some individuals choose to remain legally married despite separating. Sometimes this is to ensure the member’s former partner can receive a pension in the event of their death. It is worth paying careful attention to the definition of spouse under your rules to assess whether an automatic entitlement to benefit arises despite separation, no entitlement arises or if the decision is a discretionary one.
• Dependent adult children. Under the tax legislation, generally (there are limited relaxations for historical cases) children over the age of 23 can only receive a death benefit pension if they were dependent on the member because of “physical or mental impairment”. So if a scheme paid a pension to a 24 year old child who was “only” dependent financially this would be an unauthorised payment.
• Religious marriages not conducted in accordance with UK legal requirements. For many schemes, the definition of ‘spouse’ includes the legal spouse only and would therefore exclude any individual whose marriage would not be recognised by UK law. This is therefore an area where a discretionary dependant’s pension (as opposed to a spouse’s pension, to which there is commonly an automatic entitlement) may be the only potential benefit the individual could receive.
• Conflicts between the member’s wishes and the rules of the scheme. The member may have stated that they wish a specific individual to receive a pension benefit in the event of their death (and communicated that to that individual). But this does not of itself mean the individual will be eligible to receive a benefit under the rules of the scheme or applicable legislation.
• Cause of death. If cause of death is not shown on the death certificate due to further investigations being carried out, the decision maker should – sensitively – seek more information. This is to avoid the possibility of providing a benefit to an individual who is responsible for the death of a member, which goes against a general legal principle that an individual should not benefit from their own wrongdoing.

If you have any questions about discretionary decision making, do not hesitate to get in touch with your usual Sackers contact.

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