Death in Service Nominations, Trust Structures, and Estate Planning

Death in service benefit — the lump sum paid to dependants if an employee dies while in employment — is often the largest life insurance provision a person holds during their working years. For a senior executive earning £200,000 on a 4× salary scheme, the benefit is £800,000. Yet the mechanics governing who receives this money, how quickly, and whether it attracts inheritance tax, are frequently misunderstood — even by the employees most dependent on the protection.

This guide explains how death in service nominations work, why they are not the same as beneficiary designations under a will, how trust structures affect inheritance tax treatment, and what updating obligations arise on key life events.

How Death in Service Benefits Are Paid

Death in service benefit under most UK employer schemes is held in trust — either a master trust operated by the insurer, or an independently constituted employer trust. The trust structure is not incidental: it is fundamental to both the speed of payment and the inheritance tax treatment.

Because the benefit is held in trust:

1. It does not pass through the deceased's estate.
2. It is not subject to probate (which can take months or years for large estates).
3. Trustees — not the employee, not the will, not the family — decide who receives the money.

This is why the expression of wishes form (also called a nomination of beneficiary form, or death benefit nomination) is so critical. The form allows the employee to guide the trustees' decision. It is not legally binding — trustees retain full discretion — but trustees will follow a current, clear expression of wishes in the overwhelming majority of cases.

Discretion and Its Purpose

The reason trustees hold discretion — rather than being legally bound to pay to whoever the employee nominates — is specifically to avoid the benefit becoming part of the deceased's taxable estate. If the employee had an absolute right to direct the payment, the Inland Revenue (now HMRC) would treat it as an asset of the estate on death, potentially subject to inheritance tax at 40%.

By vesting discretion in trustees, the benefit falls outside the estate. The employee's expression of wishes is a guide, not an enforceable instruction. Trustees may depart from an expression of wishes in exceptional circumstances — for example, if new information emerges about the employee's family circumstances that was not reflected in the form, or if there are competing claims from dependants not mentioned in the nomination.

In practice, trustees almost universally follow the expression of wishes. The system functions well when nominations are current and clearly drafted.

What an Expression of Wishes Should Contain

A good expression of wishes form specifies:

Primary beneficiaries — name, relationship to the member, and the percentage of the benefit each should receive. For example: "50% to my spouse, Jane Smith; 25% to my son, Thomas Smith; 25% to my daughter, Emily Smith."

Secondary beneficiaries — who should receive the share of any primary beneficiary who predeceases the member. "If Jane Smith has predeceased me, her 50% share to pass to Thomas and Emily Smith in equal proportions."

Explanation of any unusual nominations — if the employee nominates a cohabiting partner rather than a spouse, a friend rather than a family member, or wishes to exclude a family member who might otherwise be expected to benefit, a brief explanation (held by the trustees confidentially) helps trustees understand and honour the wishes without the risk of challenge.

Percentage allocation, not named amounts — because the benefit amount changes with salary, expressing wishes in percentages ensures the allocation remains proportionate.

Common Mistakes with Nominations

Completing the form once and never updating it. A nomination completed on joining an employer — perhaps at age 28, single, with no children — may name a parent as primary beneficiary. After marriage, children, and a home purchase, this is almost certainly not the intended distribution. Trustees will attempt to locate and inform next of kin, but they cannot read minds.

Naming a deceased person. If a nominated primary beneficiary has died and the nomination has not been updated, the trustees must exercise their discretion without clear guidance.

Assuming the will covers it. A will does not control death in service benefit. Even if the will says "I leave everything to my spouse," the expression of wishes form governs the death in service benefit independently. If the employee has made no nomination, trustees will use their discretion, usually in favour of the spouse or dependants — but they are not bound to do so.

Forgetting to update after divorce. Divorce does not automatically revoke or invalidate an expression of wishes. An ex-spouse named on a form completed eight years ago remains named on that form unless it is actively updated. The trustees' discretion provides some protection — they would be unlikely to pay a substantial sum to a clearly estranged former spouse against the expressed wishes of other surviving dependants — but this should not be relied upon. Update the form immediately after separation and again after the divorce is finalised.

Leaving the form blank. Some employees, uncertain about the correct approach, return an incomplete form or fail to complete one at all. In this case, trustees must exercise pure discretion, which increases administrative delay and may not produce the result the employee would have intended.

IHT Treatment of Death in Service Benefits

As noted above, death in service benefits held under a properly constituted discretionary trust fall outside the deceased's estate for inheritance tax purposes. The sum is not aggregated with the estate value when calculating whether the nil-rate band (currently £325,000 per person, with the residence nil-rate band of up to £175,000 for qualifying properties passing to direct descendants) has been exceeded.

This makes the trust structure of group life schemes extremely valuable for HNW employees with taxable estates. An £800,000 death in service benefit sitting outside the estate is worth approximately £320,000 more than the same £800,000 inside the estate (which would attract IHT at 40%), assuming the full amount would otherwise be chargeable.

However, death in service benefits under some older schemes — or improperly structured schemes — may not be held in trust at all. If this is the case, the benefit could form part of the estate, attracting IHT and passing through probate. Employees should verify their employer's scheme structure and seek HR clarification if uncertain.

Registered Group Life vs Excepted Group Life: Trust Differences

Registered group life schemes are established under pension scheme legislation and registered with HMRC. They operate under pension trust law. Payments from registered schemes are made by the trustees to beneficiaries without IHT, provided the scheme's discretionary trust structure operates correctly.

Under post-2024 rules (following the Autumn Budget 2024 announcement on pension death benefits), the position on death benefits from pension schemes and related registered group life schemes is under review. Advice from a specialist is recommended for high-value death benefit situations.

Excepted group life schemes operate outside the registered pension framework. They were historically used for high earners affected by the (now-abolished) lifetime allowance, and are still used where employers prefer to keep group life benefits separate from registered pension arrangements. The excepted group life benefit is held under a separate discretionary trust and falls outside the estate — the same IHT treatment applies.

The excepted group life trust must be properly constituted and administered. Employers using excepted group life should ensure the trust deed is current, trustees are properly appointed, and any requirements of the scheme rules are met. An improperly administered excepted group life scheme risks HMRC treating the benefit as income of the employer or as an unapproved benefit subject to income tax and NIC.

Nomination vs Beneficiary: The Distinction in Other Insurance Contexts

The expression of wishes mechanism used in group life schemes is specific to that context. In other insurance contexts:

Individual life insurance written in trust — the trust deed specifies the beneficiaries, often with trustee discretion and a letter of wishes (a non-binding guide to trustee discretion). The letter of wishes is distinct from the trust deed and should be updated separately as circumstances change.

Individual life insurance NOT in trust — benefit is paid to the estate, passes through probate, and is potentially subject to IHT. For policies not in trust, a formal trust arrangement should be considered if the estate is above or near the nil-rate band.

Pension death benefits — expression of wishes forms for pension death benefits (lump sum or drawdown funds payable on death before or after retirement) are used similarly to group life forms. Trustees exercise discretion. Pension death benefits are outside the estate for pre-2027 purposes — see current advice given evolving legislation.

Practical Checklist: Keeping Nominations Current

The following life events should prompt an immediate review and update of all expressions of wishes:

• Marriage or civil partnership
• Separation or divorce
• Birth or adoption of a child
• Death of a named beneficiary
• Significant change in financial circumstances of named beneficiaries
• Change of employer (a new employer means a new scheme — complete the nomination form for the new scheme promptly)
• Receipt of a serious medical diagnosis (ensure nominations are in order before health deteriorates further)

Many employers make expression of wishes forms available through their HR portal or benefits platform. Completing the form takes minutes. Failing to complete it or failing to update it can result in months of delay and an unintended distribution of a substantial sum.

How Global Investments Can Help

Global Investments provides estate planning and protection advice to HNW individuals and senior executives. We regularly encounter clients whose group life nominations are outdated, inconsistent with their wider estate plan, or missing entirely. As part of a comprehensive financial review, we assess all protection arrangements — including group scheme nominations — and help clients ensure their wishes will be followed.

If you have not reviewed your death in service nomination recently, or are concerned about IHT efficiency, trust structures, or beneficiary planning, speak with one of our advisers. We do not provide regulated legal advice but work alongside qualified solicitors and IHT specialists who can help ensure your estate planning is coherent.

This guide is for general educational purposes and does not constitute regulated financial or legal advice. Inheritance tax rules, pension death benefit treatment, and trust law are subject to legislative change. Always seek professional advice tailored to your individual circumstances.