Death in Service relates to a payment to a member of a pension scheme who dies while still working and a member of the scheme. The Income Tax Act, 1972 set up the original legal basis for occupational pension schemes. Pension schemes were then primarily defined benefit schemes. The scheme member never owned the underlying assets, simply becoming entitled to specified benefits on reaching retirement age or on premature death in service. The maximum lump sum payable on death was restricted to four times the deceased members’ salary.
Most people now save for their retirement through defined contribution occupational pension schemes where the member owns the pension assets and this led to the Pensions Act, 1990 introducing the concept of ‘preserved benefit’. Preserved benefit means after two years’ service, if they leave service or the scheme is wound up, a defined contribution pension scheme member is entitled to have the value of their pension account transferred to a replacement pension vehicle under their own control. On death, the preserved benefit is payable in full to their estate if they die before pension benefits are taken.
A potentially troublesome situation has now arisen whereby members of defined benefit pension schemes left their preserved benefits with the original pension scheme. On their death before taking pension benefits, the four times salary rule applies to pay-outs and the survivors get the balance of funds as an annuity [a pension for life]. Where members transferred the pension pot to a buyout bond on leaving service, it has now become apparent that many Insurers simply applied the original defined benefit scheme rules to the new buyout bond and by doing so have inadvertently perpetuated the four times salary rule.
If you are a former member of a defined contribution pension scheme or you have a buyout bond purchased with the proceeds of such a scheme, it is very important you get a financial broker to conduct a death in service audit to ensure your pension pot is not lost on premature death.