Les Cameron explores the reality of leaving your death benefits to loved ones and why a spousal bypass trust could be a more attractive option.
Within the archetypal mid-20th century family – husband, wife and 2.2 children – the distribution of assets on death usually followed a logical path. On the death of one of the parents, assets are generally passed to the surviving parent, and on the death of the surviving parent the remaining funds are usually passed on to the children – a process that seems straightforward and logical. Pension trustees/administrators appear to accept this wisdom and in the absence of guidance from the member, they seldom look further than a dependant (such as a spouse) when it comes to exercising their discretion on the distribution of pension death benefits.
Unfortunately, modern relationships seldom follow the traditional model, and given the fact that the value of pension death benefits can be substantial, perhaps the way in which pension lump sum death benefits are distributed merits a greater level of consideration. In addition to income death benefits, such as spouses’/dependant children’s pensions, defined benefit (DB) schemes usually only provide lump sum death benefits on death pre-75 (commonly, lump sum death benefits such as death in service cease at retirement). However, in the defined contribution (DC) world, as many people have the option to vest their pension into a drawdown product, the flexibility provided by these products means the need for management of lump sum death benefits is ongoing.