Over the past decade, the UK government has legalised same-sex civil partnerships and most recently same-sex marriages. Legislation provides that same-sex couples who are married or in civil partnerships shall be treated the same as married heterosexual couples. For example, they are entitled to receive the same inheritance tax benefits, such as the spousal exemption, which exists between a married heterosexual couple.
There is, however, a gap in the equality of treatment relating to same-sex couples and their right to pension death benefits from an old style pension scheme. In John Walker v Innospec, the Court of Appeal recently held that a same-sex survivor is only entitled to receive death benefits that their spouse accrued from 5 December 2005 – which is when same-sex civil partnerships became legal in the UK.
Whilst this judgment deals specifically with same-sex couples, it serves as a warning to everyone, regardless of their marital status or sexual orientation, to ensure that their pension death benefits have been adequately dealt with.
In this blog, we discuss what the implications are of this case and what practical steps you should take to ensure that your pension is paid to whom you want.
The case of John Walker v Innospec
Mr Walker was employed by Innospec Ltd from January 1980 until he retired in March 2003. His occupational pension was worth £85,000 per year. Mr Walker cohabited with his male partner from September 1993. They became civil partners in January 2006 and subsequently married when it became legal to do so in March 2014.
Mr Walker’s pension scheme is quite rigid in terms of who can receive payment. The relevant clause specified:
“If a Member dies on or after 1 December 1999 leaving a surviving spouse that spouse will receive a pension for life.”
Mr Walker queried whether, upon his death, his surviving spouse would receive the pension that Mr Walker accrued with the company. Innospec stated that the surviving spouse would receive around £500 per year because Mr Walker’s service occurred before civil partnerships became legal in England and Wales. In stark contrast, if Mr Walker left a widow she would have been entitled to receive approximately £41,000 per year.
Mr Walker brought Innospec to the Employment Tribunal on grounds of discrimination against his sexual orientation. The case proceeded to the Court of Appeal where it was held that discrimination against sex-same couples and their right to receive death benefits could not be retrospectively changed. It was therefore lawful for Innospec to pay pension benefits to Mr Walker’s husband from the pool of funds accrued from December 2005.
It remains to be seen whether Mr Walker will appeal to the Supreme Court, which may involve a referral to the Court of Justice of the European Union. Either way, another judgment is a long way off, so for now at least we would advise taking the following practical steps.
Practical steps you can take
Until and if the law changes in relation to old style pension schemes, a same-sex survivor will only be legally entitled to receive the death benefits that their spouse accrued from 5 December 2005. This is likely to leave many same-sex survivors financially worse off than their heterosexual counterparts.
Pensions have now developed from the type scrutinised in the case and are flexible as the payee can nominate who should receive the pension death benefits and can specify how the funds should be distributed (i.e. in a lump sum or at certain stages). It is important for those with old style pension schemes to take advice and consider transferring their existing pensions to modern ones which are fully flexible.
In April 2015, new pension laws were introduced and these have beneficial tax implications. In short, the changes are:
- A deceased’s pension is paid to a beneficiary without any inheritance tax as pensions fall outside of the deceased’s estate;
- If the deceased dies before 75 years of age, their pension will be paid free of all taxes;
- If the deceased dies when they are 75 or over, the pension payment will be taxed at the beneficiary’s marginal rate of income tax from April 2016. For the 2015/16 tax year, the pension payment will be taxed at 45%; and
- If the payee chooses, pension monies can be paid via a ‘drawdown fund’ from which the beneficiary can withdraw money at any time (similar to a bank account). The beneficiary can leave any unused pension monies to their own beneficiaries providing an attractive way to pass pension monies to future generations free of inheritance tax. It also enables beneficiaries to plan their income stream accordingly.
Nomination of wishes
An individual can nominate who they wish to receive their pension upon their death by providing his/her pension provider with a nomination form or an expression of wishes. This can be done when the individual starts paying into a pension or any time thereafter. It should be regularly reviewed when the individual’s circumstances change and especially when they reach 75 years of age.
The pension provider must receive an expression of wishes/nomination form so that this can be shown to HMRC if any questions are raised about the pension payments. The pension provider will have the discretion to ensure pension funds are paid to the nominated beneficiary free of inheritance tax.
The option to nominate should be considered by all those who have pensions, but may, in the case of same-sex couples with old pension schemes, provide the survivor with that much more needed financial security and certainty.