Where the pension scheme member can nominate who will receive any lump sum death benefit, and the pension scheme provider is bound to comply with that nomination, the payment falls within the member’s estate. This is because the member has a general power that enables them to dispose of the property (IHTA84/s5(2) and IHTA84/s151(4)).
Most UK pension schemes allow members to nominate specified beneficiaries but these are generally not binding nominations. They are simply letters of wishes that record what the member would like to happen with the death benefits. Where pension scheme providers have discretion over the payment of death benefits (whether or not any letter of wishes is followed) the payment is not treated as part of the estate. This is the case even where discretion is exercised in favour of the estate or the personal representatives.
Some schemes may have a number of payment options available following the death of a member. For example, the options might be a lump sum death benefit or a nominee’s flexi-access drawdown fund. A member may make a binding nomination in connection with who should receive any flexi-access drawdown fund, but if the scheme provider can chose which type of death benefit to pay and the member cannot also make a binding nomination of any lump sum death benefit, the death benefits will not treated as part of the member’s estate on death. However, if the member can create a situation where the scheme provider has no choice and has to pay any death benefits in accordance with the member’s directions, the death benefits will be within the member’s estate on death. You should seek the advice of Technical before taking forward such an argument.
A binding nomination is most often seen in the case of non-UK schemes and some statutory schemes.
There are also other less likely situations where a person could have a general power to dispose of death benefits under a pension scheme. For example, where death benefits are assigned to a discretionary trust and the deceased had the power to appoint themselves or their estate as a potential beneficiary. However, in most cases where death benefits are assigned into trust, the pension scheme member, their personal representatives and their estate are specifically excluded from being beneficiaries.
The issue of a general power over property arose in the case of Kempe and another (personal representative of Lyon, deceased) v Inland Revenue Commissioners  STC (SCD) 467. This case involved a term life policy where the policyholder could designate the beneficiaries who would receive the sum assured when he died. After the policyholder’s death the sum assured was paid to his sisters as the designated beneficiaries. It was held that the deceased did have a general power to dispose of the property, so it fell into his estate.