What happens to my pension when I die?

The most common type of private pension scheme is called a ‘defined contribution’ pension. If you have this sort of pension, you can nominate someone to inherit it on your death. It’s usually only possible to pass on your pension to spouses or civil partners. You need to complete an ‘expression of wish’ form to do this with the pension company.

The decision about who should receive a lump sum death benefit on your death, is made by the trustees of the discretionary pension scheme. They will have regard to the ‘expression of wish’ form but they have the freedom to exercise their discretion and can consider the wider picture; they may need to consider information from multiple sources and use their judgement to decide who should get what.

Does it matter if I also inherit?

Until recently it had been thought that pension scheme trustees did not need to consider how much a beneficiary was receiving under a will. But a recent decision by the Pension Ombudsman held that a surviving civil partner’s inheritance was a relevant factor when making a decision.

Mr. T and Mr. S entered civil partnership in 2006. They applied for a divorce in 2012 but never finalized it, so that when Mr. S died by suicide in 2020, their legal relationship had not been dissolved. In 2017 Mr. S had taken out a SIPP and nominated a friend’s daughter as the person he wished to benefit from it on his death. He took out another SIPP in January 2019 and did the same thing. Although he had prepared a will before his death, it was not properly witnessed and so he died intestate.

This meant that Mr. T inherited Mr. S’s estate, worth around £550,000.  He wrote to the pension scheme, AJ Bell, and sought to claim the benefit from the pension scheme as well. The scheme administrator decided not to pay any of the SIPP to Mr. T. One of the reasons was that he would be adequately provided for as the sole beneficiary of Mr. S’s estate.

Mr. T complained to the Pension Ombudsman and one of the grounds of his complaint was that who benefited from the estate should not have been a factor used by AJ Bell in its decision-making process.

What power does the Pension Ombudsman have?

The Ombudsman could only interfere with the decision if satisfied that AJ Bell had acted improperly, in that it:

• Failed to consider all relevant factors or took into account irrelevant ones
• Asked itself the wrong questions
• Misdirected itself on a point of law or
• Arrived at a perverse decision i.e. one that no reasonable decision maker, properly advising itself of all the relevant circumstances, could reach.

The Ombudsman rejected Mr. T’s argument and found that the fact that Mr. T was the sole beneficiary of the estate was a relevant factor.

Why does this matter?

It can be very difficult to challenge a decision by pension scheme trustees about who is to receive a death benefit. This is because there are very limited grounds on which the Pension Ombudsman will intervene. But, as this issue crops up fairly often, it is helpful to know that in principle, the question of who has inherited the deceased’s estate can be a relevant factor for the trustees to take into account.

Rebecca Kershaw, Apprentice Solicitor