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Key takeaways
- Pension death benefits are paid either through direction from the member or through trustee/administrator discretion
- Direction provides certainty over who receives the death benefits but can restrict flexibility if circumstances change.
- Discretion allows trustees to consider a member's wishes alongside their personal circumstances and potential beneficiaries.
Index
Pension schemes generally pay death benefits using one of two approaches: direction or discretion.
1. Direction
Direction, sometimes called a ‘binding nomination’, is where a pension scheme administrator / scheme trustee is instructed by the pension scheme member as to who must receive the death benefits.
The advantage of this structure is that the pension scheme member has certainty over who will receive the benefit. This gives the member control over the destination. The disadvantage is that there is no ability for the scheme to pay anyone other than the person(s) named in the direction, even if they have predeceased the pension scheme member. Additionally, if the direction is not kept up to date, this could lead to death being paid to a beneficiary that is no longer appropriate for example a divorced spouse.
Depending on the scheme rules, the direction (binding nomination) may be:
- Revocable - meaning the pension scheme member can replace one direction with another.
- Irrevocable - meaning once the direction is made it cannot be replaced.
Under section 5(2) of Inheritance Tax Act 1984, payment via direction counts as a general power of disposal. This means the pension death benefits are treated as part of the pension scheme member’s estate.
Direction is normally seen under older pension contracts such as Section 32s Retirement Annuity Contracts and statutory schemes such as the NHS.
2. Discretion
As implied in the name, the scheme trustees or pension scheme administrator have the power to decide:
- who should receive the death benefits
- in what form, and
- in what proportions.
In exercising that power, they need to gather sufficient details about the deceased’s personal circumstances and potential beneficiaries. They can consider a pension scheme member’s wishes but are not bound to follow these.
Pension schemes will typically use an Expression of Wishes EoW (sometimes also called a nomination) to understand how a scheme member would like them to pay the death benefits. This is an administratively easy way of allowing a pension scheme member to keep the scheme updated on their preference. Often this form can be completed/updated online.
The exercise of any discretionary power carries fiduciary responsibilities. Importantly the Pension Ombudsman can consider how scheme trustees have exercised that power. They will consider whether:
- the scheme rules were followed
- sufficient evidence was gathered
- all relevant factors were taken into account
- the decision reached was reasonable based on the information available.
The advantage of discretion is that provides flexibility over potential beneficiaries. It also allows leeway for a if the EoW has not been kept up to date, the trustee/administrator can take into account any recent changes in circumstances for example a divorce. The disadvantages are that the payment of death benefits will take longer whilst the scheme gathers the necessary information to exercise that discretion. The pension scheme member does have less certainty over who will receive any payments, but the EoW can help ensure their preferences are known.
3. IHT
Under current rules, discretionary death benefits are generally outside the deceased's estate for IHT purposes. However, different rules can apply where
the deceased was in known ill health, died within two years and either:
- transferred from one pension to another
- assigned death benefits not under trust into one
- made contributions outside their normal pattern.
From 6 April 2027, unused pension death benefits (known as notional pension property) will form part of a deceased person’s estate for inheritance tax purposes (IHT). The IHT benefits associated with discretionary payments of pension death benefits are removed.
As a result, the choice between direction and discretion will become less important from an IHT perspective. The main differences will instead be the degree of control, flexibility and administrative complexity involved in paying death benefits.
Approver: Quilter August 2026
Q 01395/206/18433
The information provided in this article is not intended to offer advice.
It is based on Quilter's interpretation of the relevant law and is correct at the date shown. While we believe this interpretation to be correct, we cannot guarantee it. Quilter cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.