5 pitfalls to look out for when dealing with death in service
Death in service cases are rare for most employers.
But for those that administer them themselves through their own group life trust, incorrect processes can mean that mistakes are made.
It could also cause delays in money being given to a deceased employee’s beneficiaries.
Here are five potential pitfalls, and how using a group life master trust could help:
1. Not following the right decision-making process
An ombudsman or court usually won’t overturn a trustee decision if it isn’t perverse (i.e. one that no reasonable trustee would have reached).
But they can ask for a decision to be looked at again if due process wasn’t followed.
So, it’s important that the decision on the beneficiary(ies) of a death lump sum:
- Is made by the right people – by the trustees or in line with an appropriately documented delegation. If the employing company is legally the trustee of a scheme, a decision shouldn’t be made by someone in HR or Reward unless the company board has agreed (and evidenced) an appropriate delegation.
- Is in accordance with the trustees’ powers as set out in the trust deed governing the life assurance scheme.
- Is documented appropriately – it’s useful to summarize the circumstances to keep a record of evidence relating to the case.
- Considers all relevant (and no irrelevant) factors – including identifying all potential beneficiaries and their relationship with the deceased.
2. Not undertaking a full investigation of the circumstances
If a member of a discretionary life assurance scheme has died and left an Expression of Wish form, it’s important to take those wishes into account.
However, any amount due shouldn’t be automatically paid out in line with that form.
When deciding on the appropriate beneficiaries, an investigation of the surrounding circumstances should be made.
This includes:
- Asking for a copy of the deceased’s will.
- Making sure all potential beneficiaries are identified (within reason) – this may mean asking the deceased’s HR/line manager to confirm their understanding of the deceased’s personal circumstances and if they are aware of any matters that the trustees should consider.
- Not assuming that information provided by a family member in an information gathering questionnaire is full and complete – in some circumstances it might be appropriate to make wider enquiries or ask someone else to also complete the form.
If there’s an Expression of Wish form, investigating how much the deceased’s circumstances has changed since it was completed (e.g. relationship status, birth of any children, change in relationship with nominees) is crucial.
3. Inappropriate discussions with potential beneficiaries
Individuals often mistakenly believe that the proceeds from a group life policy held under trust are automatically paid to the next of kin, or in line with the Expression of Wish form.
Employers shouldn’t give any potential beneficiaries the impression that they will definitely receive any money.
Potential beneficiaries may, for valid reasons, press for information about any amounts to be paid out.
But it’s important to be clear that the trustees will only decide who will receive any amount payable after a full investigation of the deceased member’s circumstances.
Under ordinary circumstances, the amount (and timing) of any lump sum shouldn’t be disclosed until money has been received from the insurer, and the trustees have made a documented decision.
Even then, relevant information should only be given to the actual beneficiary(ies) about their share of the lump sum (other than when additional information needs to be provided to the deceased’s personal representative).
4. Not having a dedicated bank account
Once a documented decision has been reached by the trustees, they’ll ask the insurer to pay them the lump sum so they can then pay out.
But death in service insurers usually will only pay proceeds into a segregated account or, sometimes, directly to the beneficiary(ies).
If you need to set up a segregated account, the process of identifying a suitable bank, then going through the account opening and anti-money laundering process takes time.
This could delay the payment of death lump sums, creating financial issues for the beneficiaries.
Joining a master trust removes the need to set up your own segregated account or make sure things like signatories are kept up to date.
5. No HMRC registration & outdated trust documentation
Group life schemes must be registered with HMRC as they fall within the pensions taxation regime, even though they typically only pay death lump sums.
Failure to register the scheme with HMRC or notify them of certain payments could have tax implications for the employer and any beneficiaries receiving payment from the scheme.
Additionally, if you set up your group life trust some time ago, it may not reflect any changes in relevant tax legislation that have since been introduced, which can create compliance issues.
Using a group life master trust means that the monitoring of legislation, and adaptation to it, is dealt with by the trustee of the master trust.
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