Navigating pension scheme nominations: a guide for solicitors

Solicitor and client looking at a document

Navigating pension scheme nominations: a guide for solicitors

Since April 2015, legislation has brought significant changes to the options and definitions surrounding pension death benefits and how they are taxed. This has also impacted defined contribution schemes. Nominating beneficiaries for death benefits is a crucial step in guiding scheme administrators and trustees when deciding on how to distribute funds. It is vital for solicitors to comprehend the nuances of death benefit nominations to guide clients. 

Significance of death benefit nominations 

It is important to recognise that pension savings and a Will do not seamlessly align. In the event of a client’s passing before accessing their private or company pension, the task of determining its distribution falls upon scheme trustees or pension administrators. When guiding clients through this process, it’s important to review pension nomination forms alongside discussions about the Will’s contents. Despite disconnection, the two aspects can complement each other effectively.  

Disbursement of pension death benefits 

The trustees or scheme administrators of a money purchase/defined contribution (DC) pension arrangement will typically have discretion over the payment of death benefits unless a binding nomination has been established. The scheme rules will determine the range of possible beneficiaries. This will typically allow payments to family and friends, trusts created during the settlor's lifetime, trusts created in the scheme member's Will and charitable organisations. Adept legal advice from solicitors can be pivotal in crafting suitable trusts and formulating precise wording. 

Lump sum or pension 

The nomination form's wording must be precise. Without nomination of a non-dependant beneficiary, the option defaults to a lump sum when surviving dependants or other nominees are present. Designated dependants have the discretion to choose between a lump sum or pension, typically via inherited drawdown or annuity, if offered by the scheme. A lump sum payment becomes part of the beneficiary's estate, possibly incurring taxes upon future investment returns. Legal consultation is advisable in such instances. 

Taxation of death benefits – pre-75 

Death benefits from DC pensions before the age of 75 are tax-exempt, irrespective of whether disbursed as lump sums or pension provisions. While it is common for couples to nominate everything to the surviving partner after the first death, the tax efficiency of this approach warrants consideration and underscores the need for professional legal counsel. 

If paid as a lump sum to the survivor, it will form part of their estate for Inheritance Tax purposes. In contrast, inherited drawdown remains outside the estate and any unused inherited drawdown funds can be passed on. It is important to note that the tax treatment of inherited drawdown on second death depends on the survivor’s age when at the time of demise. 

Taxation of death benefits – post-75 

In cases where death occurs after the age of 75, death benefits become taxable at the beneficiary's marginal rate or 45% if paid to a trust. Lump sum disbursements are added to the beneficiary's other income in the tax year and taxed accordingly. Conversely, inherited drawdown is only taxed when the beneficiary withdraws income from their inherited fund. 

Leveraging nominations, thereby offering all beneficiaries the lump sum and pension options can mitigate tax liabilities. Accessing a lump sum subjects the entire amount to assessment within a single tax year, potentially leading to higher-than-expected tax rates. Opting for inherited drawdown allows for tax to be spread across multiple tax years, giving beneficiaries some control over withdrawals to optimise tax allowances and minimise payable tax amounts. 

Nominating a bypass trust 

Solicitors could offer added value services by advising on the potential of bypass trusts and their subsequent wording. A bypass trust empowers members to select their trustees who comprehend their unique circumstances and carry out their wishes. Paying lump sum death benefits to a trust allows the member's chosen trustees to determine how the lump sum is eventually distributed. 

Lump sums paid to a bypass trust before age 75 are tax-free, but after this age, a 45% tax is deducted. This tax can be reclaimed when the bypass trustees pay money to beneficiaries, but the investment returns within the trust may be affected. 

Nominating a charity 

Death benefits can only be paid to a charity if the member has explicitly nominated one. The scheme administrator lacks discretionary authority to allocate funds to a charity; this discretion is solely applicable to individuals or trusts. A charity lump sum death benefit can be paid tax-free, irrespective of the client’s age at the time of passing. 

This is subject to certain criteria being met: the client should have no other financial dependents and the charity has been nominated by the client. If these conditions are not met, a payment to a charity can still be made but may not be tax-free. Solicitors can play a pivotal role in guiding clients to navigate the intricate criteria surrounding charitable nominations. 

Making and changing nominations 

Most pension providers offer a standard nomination form and some will accept a written letter stating the member’s wishes. To avoid ambiguity, clarity is essential in wording nominations, a task where a solicitor’s guidance is invaluable. 

If a member loses mental capacity, their attorneys cannot complete a nomination on their behalf.  However, nominations, even binding ones to a bypass trust, are generally changeable at any time by completing a fresh nomination. 

Regularly reviewing nominations reflects evolving circumstances and member’s wishes. The change in the taxation of death benefits from age 75 can act as a trigger to review nominations, as death benefits cease to be paid tax-free after this milestone.  

Binding nominations 

Certain pension schemes allow binding nominations, eliminating the scheme trustees’ discretion and ensures the lump sum will be paid as instructed. Solicitors can play an important role in advising clients on choosing between discretionary and binding nominations. Most binding nominations remain revocable accommodating changes to changing circumstances. However, transitioning from a discretionary to a binding nomination is not feasible. 


Solicitors play a pivotal role in guiding clients through death benefit nominations and associated taxes, ensuring pension savings are distributed according to the member's wishes. By making informed decisions and keeping nominations up to date, beneficiaries can minimise tax liabilities and avoid unnecessary complications. 

Any Questions?

Talk to your Legacy Partnership Manager if you have any questions about this blog post. 

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