Beneficiary nominations: The single form that makes a huge difference

This article is intended for financial services professionals only. None of the information contained in this article should be received as advice. Pensions are a complicated area of financial planning and IPM suggests that financial advice from a suitably regulated financial adviser is sought before an individual takes any action in respect of their pension savings.

From the room in which I am typing, our management committee regularly meets to discuss the distribution of death benefits from SIPPs.

We know, as advisers, you are heavily involved in your clients’ lives. You will know their personal circumstances, their businesses, and their family. In many instances, you will know their partners, children, and, on occasion, grandchildren.

As a SIPP provider, we are often a few steps removed from knowing clients so personally. Our relationship is typically with you, the financial adviser.

However, when it comes to reviewing a client’s file in the event of their death, this is a time when IPM can be brought into what a client’s world was like. This is because, as a trustee and legal owner of the client’s pension fund, we have the ultimate decision as to how the deceased’s benefits should be distributed.

This is a big responsibility. We will use all the available information to hand to make the decision in line with what the client would have wanted.

A crucial document to help us with this is the death benefit nomination form.

Why the death benefit nomination form is so crucial to us

As the name suggests, this form allows the client to make a nomination as to who the trustee should designate benefits to in the event of their death. However, it is not legally binding, hence IPM and all pension trustees have the final say as to how these benefits are designated.

When someone establishes a SIPP with IPM, a nomination form is part of the SIPP opening paperwork. We then retain this on file to refer to in the future.

As a trustee, we want the deceased’s wishes to be laid out as clearly as possible to avoid future confusion; we would be happy if a side letter accompanying the nomination form was provided if an individual feels the form’s template does not allow them to accurately express their wishes.

With that said, it should not be a case of filling in this form once and then not considering it again; we would suggest this forms part of an adviser’s annual review for a client to see if the circumstances around the nomination have changed.

Here are some examples of client scenarios we have seen when it comes to the trustee designating death benefits and the impact that the nomination form, or a lack of one, can have.

No nomination form on file

Where we set up a SIPP and a nomination form has not been provided, this would not prevent us from proceeding; however, we will let the adviser know this has not been included.

Not having a completed nomination form on file when we are informed of an individual’s death makes matters difficult for the trustee when it comes to designating their benefits. This is the trustee’s first stop when determining to whom the death benefits will be designated.

Where a nomination form is not available, we can liaise with the people acting on behalf of the deceased, for example the financial adviser, to see if any other documentation is in place to guide us, like a will. However, this may not always accurately reflect what an individual’s wishes were.

Blank nomination form provided

We have had situations where a nomination form has been provided by an individual and signed; however, to whom the benefits should be left is incomplete.

This usually happens when this is being sent in to replace a nomination form previously in place. Perhaps the individual’s circumstances have changed, and they no longer wish to nominate the person / people originally in place?

While we understand this, a blank form does not necessarily assist us. It leaves the trustee with no direction at all as to where benefits should be designated and often leaves us with more questions than answers to try and ensure the deceased’s wishes are fulfilled.

One person nominated, since predeceased

Often, people will nominate their spouses as the sole beneficiary to their SIPP in the event of their death. These tend to be some of our more straightforward designations.

However, we have come across instances where the individual’s spouse has pre-deceased them, yet the nomination form has not been updated to reflect this.

We completely understand that the death of a spouse is an emotional time for anyone. As financial planners, no doubt you are dealing with a multitude of matters to support the surviving spouse, including dealing with life insurance policies and updating their will to reflect the change in circumstances.

It can be easy to forget a SIPP death benefit nomination form among all this; an amendment to the will does not automatically transcend to the SIPP nomination. This is why we suggest regularly reviewing the death benefit nomination for any SIPPs your clients have. It could be decades since the SIPP was first established, so making this part of your annual review will allow for any change in client circumstances to be picked up.

Divorced – but the nomination form has not been updated

This can be a tricky one and a scenario we have encountered in the past.

Following on from the above, often individuals will nominate their spouse when setting up their SIPP and filling out their death benefit nomination form. If several years later the couple should divorce, the SIPP nomination will need to be amended in addition to all the other documentation to separate a couple’s finances.

Otherwise, in the event of a divorced individual’s death, if the nomination form still shows an ex-spouse, this can put the trustees in a difficult position when it comes to designating benefits and fulfilling what the client would have wanted us to do.

Naming more than one person on the nomination form

Our nomination form has space for people to nominate several individuals who their trustee should consider designating benefits in the event of their death. It also has space to indicate what percentage of their SIPP should be designated for each nominee.

This is often the case where someone wishes to nominate their children or grandchildren to receive their benefits. However, we also see people nominating their spouse to receive most of the SIPP and their children and / or grandchildren to receive a nominal amount, say 1%. This has several benefits for the trustee when it comes to designating benefits:

In the event of the spouse pre-deceasing the client and an updated nomination form not being provided, it is a clear indication that the deceased wished for the trustee to consider other people when it comes to making the final decision.
By naming other parties and the client declaring that they wish for the trustee to offer beneficiary drawdown to distribute death benefits as opposed to just paying out a lump sum, this gives all nominated individuals the flexibility to decide what is best for them. Without these individuals being included on the nomination form, if the trustees were to come to a decision to designate benefits to them, the lump sum option is the only one available.
If the deceased has nominated their spouse and their two children on a 98% / 1% / 1% basis, for example, in the event of the client’s death the spouse has the ability to direct the trustees that they wish to forego their entitlement to benefits in favour of the other nominated beneficiaries.

Leaving benefits to charity

In some instances, an individual may wish to leave the benefits accrued in their SIPP to a charity. HMRC has clear guidelines as to how a charity lump sum death benefit can be paid since these can often be paid out tax-free:

HMRC state that a charity lump sum death benefit can be paid if:

It is paid from a money purchase arrangement (including a cash balance arrangement)
It is paid to a charity nominated by the member, and…
At the time it is paid there are no dependants of the member (as defined by HMRC).

A charity is defined by HMRC as one which meets the definition in paragraph 1 Schedule 6 Finance Act 2010.

Therefore, it is important that if you have a client who is looking to nominate a charity to receive benefits in the event of their death, this is made clear to the trustee, either by completing the nomination form or providing a side letter clearly stating their intentions.

Get in touch

If you have any SIPP-related queries, or if you have any clients for whom SIPP or SSAS advice would be beneficial, please get in touch.

Email info@ipm-pensions.co.uk or call 01438 747151.