Many employees are entitled to a death in service benefit from their employer. The figure can vary considerably from a very small sum to over ten times an employee’s annual salary. The benefit is usually linked to the staff pension scheme and will be free of inheritance tax, if the following criteria are met:
- The payment is no greater than four times the annual salary.
- The nomination of a beneficiary is made before the employee’s death.
- The payment is made before the date the employee receives a pension.
Death in service benefits are unusual in that that they are paid outside of a will or the intestacy process, i.e. they do not form part of the deceased’s estate. On the downside, this means that dependents, and the courts, have no means to intervene if there is a dispute about who receives the payment. As these benefits are usually part of a pension scheme, trustees will normally have discretion about who to pay, but they are usually very reluctant to go against the employee’s previous nomination.
A case we came across involved a young employee who was tragically killed in a motor cycle accident. Although he had recently become a father in a new relationship, he had not considered his death in service nomination and the payment was made to his previous partner (a relationship that had ended acrimoniously). Following his death, the company instituted a scheduled reminder for all employees to review their nominations.
As with all estate planning (wills and other post death considerations) regular reviews of personal circumstances are essential and, in this case, the responsibility sits squarely with the employee. But employers can give a helping hand here, with an annual message to encourage employees to review their nominations, ensuring those named still reflect their wishes.
It takes only a minimal effort to send an annual reminder, but for those families involved in the tragedy of bereavement, it could make a world of difference.