New flexi pension rules give a variety of possible options available to surviving beneficiaries of a deceased pension scheme member. One of the possible options could be that of taking the lump sum death benefit, in which case nominate any benefits paid as a lump sum/ return of fund from a pension fund on death to trust. Appropriate financial services advice should be taken at that time as to the appropriate course of action.
As the Death Benefits are paid at the discretion of the Pension Trustees, they are not part of or do not increase the deceased’s own estate for their Inheritance Tax. However, they will increase the recipient’s estates for Inheritance Tax purposes (note that in exceptional circumstances the lump sum can form part of the deceased Pension member’s estate, but only for certain Policies that have not been written since 1986).
Furthermore, the lump sum Death Benefit will also be at risk from the recipient’s remarriage, divorce, creditor claims and long term care fees. This also applies to most Death in Service Scheme benefits, where an employee’s family may receive a multiple of an employee’s salary upon his death.
It is recommended that to protect such lump sum Death Benefits from these risks the individual should nominate the Death Benefits to appropriate Pension Death Benefit Trusts.