Understanding the rules of their pension scheme is essential for those working in the public sector – particularly so, explains Moira Warner, when it comes to what will happen to their pension money when they die.
The financial fall-out following a death can often be difficult for those who are left behind, especially with the rise in recent years of cohabitation, second marriages and split families.
For those working in the public sector, understanding the rules of their pension scheme is essential to receiving sound holistic financial advice – in particular when it comes to what will happen to their pension money when they die,. This area is referred to as ‘survivor benefits’.
Although recent high-profile cases in the Supreme Court have caused public service pension schemes to revisit certain aspects of their rules, removing nomination requirements for cohabitees and addressing inequitable treatment of same sex spouses, survivor benefits remain an enormously complex area of public service pension scheme provision.
Survivor pensions
* Qualifying service: Entitlement to a long-term adult pension is generally dependant on the deceased member having at least two years’ worth of ‘qualifying service’. This applies, for example, to teachers, NHS and local government workers.
It is worth remembering qualifying service can include not only the period of active membership in the relevant scheme, but also transferred-in service. Furthermore, some schemes, such as the NHS, will pay a short-term adult survivor pension where the deceased had insufficient qualifying service. The qualifying period does not, however, apply to any lump sum death benefit where individuals are normally covered immediately on joining the scheme.
* Eligibility of cohabitees: Although public service pension schemes are now generally dis-applying the long-term pension nomination requirement for cohabitees, all other eligibility criteria for non-legalised partners will still need to be met. These typically include demonstrating financial inter-dependency and both parties being legally free to marry or form a civil partnership.
Many schemes also require that the couple have cohabited under these conditions for a minimum period of two years, for example teachers’ and NHS schemes. There may be people who have cohabited for more than two years but who are not yet divorced from an estranged spouse. In this case, the new partner is unlikely to be entitled to any survivor pension entitlement.
* Eligible service: Scheme regulations have changed over time to reflect social change, including the introduction of pensions for civil partners and cohabitees in the noughties. Generally, however, these changes have been introduced in respect of future service, or service from a specified cutover date or in redesigned, upgraded schemes only.
As an example, only service from 1 January 2007 and 1 October 2002 counts towards a cohabitee pension for a teacher in England & Wales, or a civil servant respectively. In the case of the Civil Service, survivor pensions are not payable to cohabitees under the ‘Classic’ scheme at all. It is worth noting some schemes offer members the opportunity to buy extra service counting towards dependants’ pensions.
* Short-term survivor pension: Many schemes offer short-term pensions on death in service in addition to the continuing long-term pension. This is intended to help during the especially difficult period immediately after death. Where this is a scheme feature it is typically payable for three or six months at a higher rate than the long-term pension. Scheme rules vary as to whether these two pension elements are paid concurrently or consecutively.
* Eligible children: Where no pension is payable to a surviving adult, many schemes provide for the eligible children’s pension to be payable at a higher rate – for example local government, NHS and teachers’ schemes.
* Remarriage: Despite continuing pressure from unions and others, many schemes still stop paying a survivor’s pension on remarriage/cohabitation. In particular this may apply if the deceased member had no service after a specified cutover date – typically some time during the noughties.
The rules vary from scheme to scheme, but there are two key exceptions. First, all pensions awarded to survivors of members of the armed forces are payable for life in recognition of the special challenges the surviving partner faces in making adequate independent pension provision. Second, pensions for survivors of police officers and firefighters who die on duty are also payable for life.
* Marriages: A small number of schemes – for example, the police pension scheme – contain arrangements to limit the pension payable to a surviving adult where there is a significant age gap, and to prevent the scheme being taken advantage of through ‘deathbed’ marriages.
* Singletons: Conversely, a limited number of schemes – for example, the Judicial Pension Scheme 1993 and Civil Service ‘Classic’ – allow members to take a partial refund of contributions if they have not been in a legalised relationship throughout their pensionable service. The teachers’ scheme allows single teachers to nominate a close financially dependent relative to receive the adult survivor’s pension in the absence of a long-term partner.
Lump sum death benefits
* Nominees: Lump sum death benefits are covered by separate scheme provisions and default distribution arrangements in the event no nomination is in place. By way of example, where there is no effective nomination, NHS and teachers’ schemes will pay the lump sum to the spouse, civil partner or (nominated) co-habiting partner, or to the member’s ‘legal personal representative’ (LPR) if there is no such eligible person. Similarly, where there is no nomination, the Civil Service will make the payment to the LPR.
Under the Local Government Pension Scheme, the member’s administering authority exercises discretion so there are no specific distribution or nomination arrangements although members are normally able to express a wish. Eligible nominees vary from scheme to scheme. Most allow more than one individual to be nominated and some – for example the NHS and Civil Service ‘Alpha’ schemes – also allow a trust or charity to be a nominee.
* Binding nominations: Where a nomination is in place, this is generally binding and typically continues until revoked or the nominee(s) pre-decease the member. As an example, under the teachers’ and NHS schemes, any nomination survives separation or divorce.
In some cases, the scheme administrator has an element of discretion over whether or not the death benefit may be paid. In these cases, the nomination typically remains binding in all or most circumstances – even where the payment is deemed discretionary in nature for inheritance tax purposes. This is the case for teachers and the Civil Service.
* Opting out: Arrangements for survivors of deferred members are generally less generous than those payable where the member dies in active service. This is important for anyone thinking of leaving their scheme for pensions tax reasons.
Where there is complexity, there is also risk so, when dealing with public service pension scheme clients, it is important advisers check the scheme rules to ensure partners have a survivor pension entitlement, that their entitlement is adequate having regard to the member’s relevant service and that any lump sum death benefit will be distributed according to the member’s wishes.
Moira Warner is technical manager at Prudential
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