When reviewing your Will you might become aware of a death-in-service scheme in place with your employers which could provide you with valuable life insurance cover in the event of your death.
Payments made under these schemes can be in excess of £100,000 which can have a huge impact on your estate, or the beneficiaries of it.
In the majority of cases you will not own the policy yourself - it will be held by trustees for the scheme. You may have been invited to complete a letter of wishes, or form of nomination, confirming who you would like the proceeds paid to in the event of your death.
Many simply nominate their spouse or partner without considering the potential consequences of doing so. Circumstances can change and a death-in-service benefit is often something that is not kept up to date.
As you do not own the policy yourself, the proceeds will not form part of your estate and will not therefore be subject to Inheritance Tax, or be distributed in accordance with the terms of your Will.
This freedom from the rules of Inheritance Tax gives you the opportunity to direct the fund to someone other than a surviving spouse, should you so wish. Your spouse may well be provided for adequately by other assets in your estate so you could pass on a tax free lump sum to children, or to an unmarried partner, to ensure that provision is made for them when you die.
If the simple solution is to nominate the policy proceeds to your children then problems may occur should they be under the age of 18 when you die. You might therefore like to consider the option of asking the trustees to pass the proceeds of the policy into a trust or settlement which you can set up during your lifetime. This is known as a Pilot Trust.
Where a Pilot Trust has been set up, in the event of your death, the proceeds of the policy would pass to the trustees of that trust to hold in accordance with the terms you establish during your lifetime. This can mean providing a steady income for a surviving spouse, partner or children and acts as a tax efficient way of ensuring the Inheritance Tax liability on the second death is reduced.
Our advice is to consider carefully the value of your own estate, and establish what would be paid under your own benefit scheme in the event of death. You can get this information either from your employer or the company that administers your pension.
You should also ensure that your nominations are reviewed regularly and changes made where appropriate.
If you would like to discuss the above options or to review your own Will, please contact a member of the Private Client Team.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.