Battles Lost?

by George on March 16, 2013

You win some, you lose some


After months of trying, my quest for more flexibility in releasing pension funds for the terminally-ill hits the buffers or to be more accurate, is shunted into the sidings. With your pension and with normal life expectancy, you will usually take tax-free cash and buy an annuity giving you a guaranteed income for life. Annuity rates are low currently. According to BBC Radio 4 last week, 10 years ago a 65 year old man would have got 15 per cent, now the rate is 5 per cent, but that is not the issue here.

If you smoke for example, you may get a slightly higher (enhanced) rate. If you have a serious illness you can get an even higher (impaired life) rate. But in both cases, you are kissing the capital goodbye which is what people really hate about pensions. There is some compassion built in to the system. If you have 12 months or less to live, then a serious illness lump-sum payment can be made meaning the whole fund is paid out to the pensioner concerned. This can be used for private medical treatment, that trip of a lifetime or given away. As the saying goes, it is nicer to give with a warm hand rather than a cold one.

To get a serious illness lump-sum payment involves paperwork. This means birth and maybe marriage certificates plus the evidence of a recognised medical practitioner. Paperwork delivered, the decision whether to pay out or not on the grounds of serious ill health, rests with the pension trustees.

Pension law is based on trust law where one needs to understand the difference between a registered legal owner and a beneficial owner. When you buy a property for example, buried in the small print of the contract is the phrase “the vendor sells as beneficial owner” meaning they are selling in their own right.

Putting it another way, supposing you become a parent and generous relatives given money for the new family member. This can be put into a separate account for the bundle of joy concerned, but they obviously aren’t able to do this or manage the account. Step in parents/grandparents who can. They open the bank account for the new arrival (say, parent’s name/child’s name), but this account is different from their personal accounts. The new bank account is legally owned by the parents but they own it for the benefit of little Johnny – in legal speak, the parents are the trustees and little Johnny is the beneficiary or beneficial owner.

I’m in Charge

So back to pensions. Nobody owns their pension funds – trustees own these for us and we are the beneficiaries. Trustees have a large and very detailed job description in the form of a Trust Deed. They have absolute discretion here and will usually follow the wishes of the pensioner concerned. But in one notable case a couple of years ago, the trustees paid out the pension benefits to the beneficiaries they thought deserved the money, rather than the nominated beneficiary. Don’t know the detail here, but a likely explanation is that the pensioner concerned nominated his mistress as beneficiary while his family probably including young children were excluded.

So the trustees have absolute discretion. Fortunately for CancerIFA’s latest referral where the lady has cancer for the third time, the paperwork arrives just in time. After knowing about the case for weeks, the trustees agree to pay out only after taking professional advice which causes extra delay. The cheque is posted but only arrives on the day she dies – time from first contact to client passing on – 58 days. Overall the exercise is very worthwhile for the family concerned. Total costs to client’s family are £840 including CancerIFA’s fees but pension benefits recovered are over £20,000. Had the client not made contact, the lump-sum would have been lost – sounds unfair, but that is what the pension rules or trust deed says.

Do you know what would happen to any of your old pension benefits from previous employments? Would your family receive a penny if you died before the Scheme Pension Age? Are your Nominated Beneficiary details up to date? You might want to check or get your financial adviser to do this.

And the story of trying to change the law for more flexibility? It’s quite long, so will have its own blog.

Image details: The Total Defeat by Kazuya Akimoto

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