Under the pre-6/4/2006 regime, there was a procedure for dealing with the disposition of death benefits where the trustees were unable to select the appropriate beneficiary within a 2 year period. This procedure is described in paragraph 11.5 of the 2001 edition of the Practice Notes thus:

"The money may continue to be held under the rules of the pension scheme for a period not exceeding 2 years if this is necessary for the trustees/administrator to determine who is to benefit, and interest may be credited provided the lump sum thus payable (excluding refunded contributions and interest thereon) does not exceed the limit in whichever is appropriate of paragraphs 11.2 and 11.3. The money should be paid over promptly to the beneficiaries (or to a trust for their benefit) once they have been selected, or transferred to an account outside the scheme if they have not been selected after 2 years."

However, it was not clear whether or not a similar procedure could be used where a lump sum on death before age 75 became payable on or after 6 April 2006. As is well known, there is a specific end date* after which such a payment will be unauthorised. The existence of this deadline can put pressure on trustees and being able to defer a decision by making an authorised payment to a holding account outside of the scheme (for example to a separate trust) with actual beneficiaries to be selected later would be useful.

*this is defined in FA 2004 as "the end of the period of two years beginning with the earlier of the day on which the scheme administrator first knew of the member's death and the day on which the scheme administrator could first reasonably be expected to have known of it" (FA 2004 Sch 29 para 13(c) as amended by FA 2007 Sch 20 para 13(2)).

The RPSM is, at best, ambiguous on whether a payment to an account outside of the scheme or to a separate trust is permitted. The point is not covered explicitly in RPSM and on the page headed "Who a lump sum death benefit may be paid to" (RPSM 101.05.020) it says:

"A lump sum death benefit does not have to be paid to a dependant of the member. It may be paid to any nominated beneficiary, including a company, trust, charity or the member's legal personal representatives. A lump sum death benefit may also be paid at the discretion of the scheme administrator or scheme trustees. The scheme rules will set out to whom a lump sum death benefit may be paid for a particular scheme."

This seems to suggest that a payment can only be made to someone (or something) that is not a dependant if the member has nominated that other person (or thing).

As a result of this potential confusion, Aries contacted HMRC to clarify the position. In response to the questions raised, HMRC said:

"The legislation is fairly open on this point, in that schemes can pay such lump sums to anyone (or anything) and that it can be tax free. Therefore where for some reason there is a delay in paying a lump sum death benefit, pension schemes have the option to transfer the monies to an account outside the scheme, so that the eventual payment to the recipient is not being made from a registered pension scheme and does not fall under the pension tax rules. The payment to the account outside the scheme would be a payment from a registered pension scheme, and would still have to satisfy the pensions tax rules, including being made within two years, to be treated as an authorised payment."

and, in a second response, confirmed that:

"the legislation does not specify who the lump sum must be paid to. Therefore it is the first payment that must meet the conditions set out in the legislation, and if there is a subsequent further payment from this person or account or whatever, Part 4 FA04 does not apply to the subsequent payment. So…. it wouldn't matter if the trustees are unable to decide who the money should eventually go to."

This answer seems unequivocal. There is no legislative barrier to the payment of a lump sum death benefit to an account (or trust) outside of the scheme being made within the two year deadline where the trustees are unable, at that stage, to determine who should ultimately receive the benefit. Of course the rules of the particular scheme would need to permit such a payment and legal advice may be needed where establishment of a separate trust is being considered.