To understand the effect of any change, you need to know what may have been available whilst you were an active member. Only then will you realise what effect any change could have had to your lump sum death benefits (if at all):
Death in service lump sums for an active member could include a payment to your spouse or dependants calculated as:
- A multiple of your earnings (e.g. 2 x, 3 x, 4 x).
- A multiple of your pensionable earnings (e.g. 2 x, 3 x, 4 x), which is likely to be lower than 1 above.
- A return of your own contributions to the scheme with or without interest.
- A fixed sum (e.g. £5,000, £10,000).
When you became a preserved member, the lump sum payable to your estate is often limited to only 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 having been made redundant 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:
- A refund of your own scheme contributions paid with or without interest.
- A multiple of your pension (e.g. 2 x, 3 x).
- A fixed lump sum.
- 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 – having been made redundant.
His pensionable salary before his redundancy was £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 was 3 x pensionable salary = £102,000
As a preserved member – (after redundancy)
refund of member contributions without interest = £12,000
Andrew’s spouse and dependants will receive £90,000 less in death benefit after redundancy if he dies before normal retirement age.
Summary
This shows the scale of the change in the lump sum death benefit that may happen when changing scheme category from an active member to a preserved member.
People seldom have identical pensions and you should avoid drawing comparisons with colleagues whose circumstances may at first appear the same but could emerge as having significant differences.
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 v1.4 Preserved
Last reviewed 10/08/2009
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