Expression of wishes even more important under consumer duty

According to the Office for National Statistics, in the week ending January 13 2023, 17,381 deaths were registered in England and Wales.

While a spike in deaths is not unusual at the start of the year during the winter months, this figure was 19.5 per cent above the five-year average. 

This should concentrate adviser’s minds on financial planning and particularly what needs to be in place in the event of a client’s death. The inheritance tax benefits related to pension assets on death are of course favourably treated and an area in which advisers can add considerable value by providing reassurance that the assets will go to the right people with minimum fuss.

Due to ambiguity, challenge or no expression of wish form, in the past four years Quilter has seen more than one in five pension death claims be delayed or the option for the pension money to remain invested lost because of no EoW.

As will be the case with most defined contribution pension schemes, without an EoW the scheme administrator’s job of deciding who will benefit from remaining funds on death can become much more involved.

To offer a real example, we had an EoW form for a recently deceased client who, at the point of death aged over 75, had seven grandchildren. However, his form, which hadn’t been updated in years, stated that he had two grandchildren. The result was that we could pay cash lump sums to the unnamed grandchildren, but not in the form of drawdown and therefore subject their entitlement to higher rates of marginal tax than was necessary. 

With the new consumer duty regulations placing a firm emphasis on advisers and providers to avoid causing foreseeable harm, the lack of an EoW form being filed may be viewed through the lens of ‘foreseeable harm’ as it can have huge tax implications when passing on an estate.

While in most cases the lack of EoW does not create a problem, as an industry we should not be complacent. Even relatively straightforward scenarios can be problematic.

Spouses are typically never an issue, as they qualify for drawdown entitlements under the dependency rules. As do dependent children in the main, provided they are under the age of 23. But even then, we see problems as EoWs aren’t updated to reflect the names of the adult children who are over that critical age and are now no longer classed as dependant.

If they are not named, the scheme administrator can’t set up a drawdown for them (if another dependant already exists or there is an EoW on file), which could have poor tax outcomes as lump sums, if death occurred after 75, would be taxed at the beneficiary’s marginal rate. 

But far bigger problems are much more likely to occur when the client’s family circumstances are complicated and there are family or friends who feel they have been unfairly overlooked. And therefore, scheme administrators need an EoW to tell them what the member’s wishes were to help the discretionary decision process, and this will be increasingly important under the new duty.

A brief look at previous Pension Ombudsman cases shows how detrimental a lack of EoW can be for those involved. In the case of Rushin v The Aviva Staff Pension Scheme, an EoW form had not been filed, leaving the trustees to take the decision to pay death benefits to the partner.

This was challenged by the member’s parents given the couple were not married and she was receiving income from a previous partner. The ombudsman upheld the trustees’ decision on the grounds the couple were financially dependent, but it would have taken a lot of time and, presumably, stress to reach that verdict. 

Major life changes are an ideal prompt to have conversations about updating an EoW, such as divorce or marriage, and with some platforms the form can be easily updated digitally.

The risk is that EoWs are seen as a piece of administration that is low priority in annual reviews, but they should be a priority in light of the consumer duty.