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7th February 2012
:: Scheme Member | Redundancy | Redundancy - Lump sum death benefits | Active members of a DB scheme

Redundancy: Lump Sum death benefits – Active Members
Quicknote: Possible changes caused by redundancy
 
Changing from an Active Member to a Preserved Member in a defined benefit scheme.
 
As an active member of your pension scheme you may enjoy substantial life insurance cover provided by your employer. This is usually in addition to any dependants’ pension benefit payable (to a spouse, civil partner, children etc).
 
When you stop being an active member and become a preserved member following redundancy, any lump sum death benefit cover that you may be entitled to as an active member will cease - either immediately or shortly after redundancy. Any lump sum payable on your death after you have been made redundant is likely to be much lower than applied before redundancy. 
 
  
 
 
 
  
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Death in service lump sums for an active member could include a payment calculated as:
  1. A multiple of your earnings (e.g. 2 x, 3 x, 4 x)
  2. A multiple of your pensionable earnings (e.g. 2 x, 3 x, 4 x), which is likely to be lower than 1 above.
  3. A return of your own contributions to the scheme with or without interest
  4. A fixed sum (e.g. £5,000, £10,000) 
When you become a preserved member, the lump sum payable to your estate is often limited to a return of your contributions to the scheme (maybe with an element of interest added). The reduction can be dramatic – but the significance of the decrease is not often realised by members or their dependants until it’s too late.
 
It is essential that you investigate what lump sum is available on your death after redundancy and make arrangements to replace the cover if it is essential to your pension planning and life assurance needs.
 
Lump sum death benefits for a preserved member could include:
  1. A refund of your own scheme contributions paid with or without interest.
  2. A multiple of your pension (e.g. 2 x, 3 x)
  3. A fixed lump sum.
  4. No lump sum.
Sometimes, although this may only happen in a minority of schemes, the lump sum death benefit is only payable where there is no spouse’s or dependants’ pension payable. So, under these circumstances, if you did leave a spouse or dependant, there would be no lump sum payable to your estate.
 
 
Example
 
Andrew Williams – being made redundant.
His pensionable salary is £30,000 p.a.
His contributions to the pension scheme totalled £12,000.
 
Lump sum death benefits:
 
As an active member -
lump sum death in service cover is 3 times his pensionable salary plus a return of his contributions   = £102,000
 
As a preserved member -
refund of member contributions without interest  =   £12,000
 
His spouse and dependants would receive £90,000 less if he died before normal retirement age.
 
 
Summary
 
This shows the scale of the change in the lump sum death benefit that may happen when being made redundant.
 
People seldom have identical pensions and you should avoid drawing comparisons with colleagues whose circumstances may at first appear to be the same but could be significantly different.
 
This Quicknote forms part of our Module about Redundancy and should be read alongside the other Factsheets and Quicknotes in the series.
 
This is not an authoritative document. Seek professional advice from an appropriately experienced and qualified adviser.
 
 
Redundancy: Lump sum death benefits v1.6 Active
Last reviewed 10/08/2009
  
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Redundancy: Lump sum death benefits - Active Members
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