Death benefits

This blog in intended to give you a “whistle-stop tour” of the issues around death benefits.

By Jonathan Galbraith - January 2021

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A question that often comes up when I am writing pensions reports for the courts is in respect of the death benefits that pension schemes may pay, and what happens to these on account of the divorce. This blog in intended to give you a “whistle-stop tour” of the issues around death benefits.

Let’s start with the easy ones: defined contribution schemes. Such schemes do not tend to provide any explicit spouse’s benefits upon the member’s death, but the accumulated “pot” in the scheme will be paid out according to the “expression of wish” form that the individual will complete. Individuals can nominate whomever they wish to receive the proceeds of their defined contribution pension pots, and it follows that divorcing parties will seek to update this around the time of the divorce (employers that provide pension benefits via defined contribution schemes will often provide death-in-service cover via some external arrangement: this is not then a pension benefit to be considered further.)

The death benefits in defined benefit schemes are altogether more complex. Most schemes will provide the following in the event of a member’s death:

  • A spouse’s or civil partner’s pension, typically 50% of the member’s pension, payable immediately and regardless of whether the member was active, deferred or a pensioner when death occurred;
  • Where the member’s death had occurred in the first five years of retirement, the balance of five years of the member’s pension would be payable as a lump sum (what is known as a “five-year guarantee”);
  • Children’s pensions may also be payable; schemes differ on the exact circumstances where these are payable; and
  • Where there are no other identifiable beneficiaries, a lump sum amount may be payable to the deceased’s estate.

In terms of the main death benefit that is payable—being the spouse’s pension—it is noted that i) pension schemes often have different definitions of spouse (some will only pay a pension to a legal husband / wife / civil partner; others will consider common law partners etc); ii) some have provisions whereby very much younger spouses receive a lower pension (usually an age difference of 10+ years); iii) spouses (however defined) may not be entitled to benefits if the relationship was established after retirement; and iv) some will stop paying spousal benefits where the widow(er) remarries.

The situation with State pensions is even more complex as a lot depends on whether each spouse or civil partner reached State Pension Age before or after 6 April 2016. There are therefore a number of permutations of what can be inherited depending on the specifics of the State pension benefits held by each party.

Once decree absolute is pronounced, the couple are legally divorced and so neither is then the legal spouse of the other. This means that the eligibility for the death benefits that a woman has in her husband’s pensions (and vice versa) is lost upon the divorce, and such death benefits then only have a value where the husband remarries (or has another such eligible spouse upon death e.g. a common law spouse).

Finally, let us consider annuities in payment. Where a “single life” annuity was purchased, there is no spouse’s pension and thus the divorce has no impact upon this. However, annuity providers have been known to operate a number of different treatments where the holder of a “joint life” annuity becomes divorced. Some policies have the spouse’s name attached to them, such that the ex-spouse will still receive the death benefits despite the divorce; some insurers will pay a spouse’s pension to any spouse at retirement, and others will convert the joint life policy into a single life one i.e. remove the spouse’s benefits upon the divorce and increase the benefits payable to the member.

When I am performing calculations in respect of pensions remedies upon divorce—pension sharing, offsetting etc—I do not typically take account of such death benefits, only the actual pensions payable to the divorcing parties. However, I always recognise that these considerations are often highly pertinent to the individuals in such cases, as they want to gain an understanding of how such entitlements will change following the divorce.

Jonathan Galbraith
Head of Product & Risk and Senior Report Writer

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