Private pensions and lump sum payouts

There may also be an underpayment due to the estate.

Writing to the pension provider

A recommended first step is to write to the pension provider. Advise of the death, include the deceased’s full name and reference number, and send a copy death certificate. Request details of any underpayment and/or lump sum payout. Ask whether the payout (if any) is due to the estate and whether it should be added to the value of the estate for inheritance tax purposes.

Lump sum payouts

In many cases, the pension will provide for a lump sum to be paid on the death of the policy-holder.

The lump sum will either be payable to the estate or, more likely, to a nominated person. In terms of inheritance tax, these are treated very differently.

If the lump sum is payable to the estate, it will be added to the value of the estate. It may result in more inheritance tax.

Lump sum payable to a nominated person

Alternatively, the lump sum may be payable to a nominated person at the discretion of the pension scheme “trustees”. In this case, the pension is said to be written in trust.

The nominated person will have been named by the deceased during his or her lifetime, probably when the pension was set up. It may be the deceased’s surviving spouse or civil partner, or some other person. Although the trustees have discretion as to who receives the payout, almost invariably they will pay the sum to the nominated person.

For legal reasons, because of the trustees’ so-called discretion, the value of the lump sum will not be added to the deceased’s estate. Effectively, the lump sum bypasses the estate and goes straight to the nominated person. It does not count for inheritance tax.