Death in Service Benefits and Your Will: What You Need to Know

Many employers offer a death-in-service benefit as part of their employee benefits package. It is one of the most valuable financial protections available to employees — typically paying a lump sum of two to four times annual salary to a nominated beneficiary on the employee’s death while employed. Yet it is also widely misunderstood.

The crucial point is that death-in-service benefits do not form part of your estate and are not governed by your will. Understanding how they are paid, how to nominate beneficiaries, and how they interact with inheritance tax is essential for coordinated estate planning.

How death-in-service benefits are paid

Most employer death-in-service schemes are set up as discretionary trust arrangements. The benefit is held by the scheme trustees (usually the employer or a specialist trustee company), not by the employee. When the employee dies, the trustees exercise their discretion to pay the lump sum to whoever they consider appropriate — guided by, but not bound by, any expression of wishes (or nomination form) the employee has submitted.

Because the money is held in trust and the trustees have discretion over who receives it, the benefit:

• Does not form part of the deceased’s estate for probate purposes.
• Does not pass under the terms of the will.
• Is generally free of inheritance tax (because it was never the employee’s property).
• Is paid more quickly than estate assets, since probate is not required.

A minority of schemes are set up as bare trust policies rather than discretionary trusts. In these cases, the benefit must be paid to the nominated beneficiary and cannot be redirected. The IHT position may differ, so check the scheme rules.

Nomination forms: expression of wishes

Most employers ask employees to complete an expression of wishes form (sometimes called a nomination form) stating who they would like to receive the benefit. Although the trustees are not legally bound by this form, in practice they follow it in the vast majority of cases — unless circumstances have changed significantly (for example, the nominated person has predeceased, or there is evidence of family breakdown not reflected in the form).

You should review and update your nomination form whenever your personal circumstances change:

• Marriage or civil partnership
• Divorce or separation
• Birth or adoption of a child
• Death of a previously nominated beneficiary
• Change of employer

Many people update their will after a major life event but forget to update their nomination form — meaning the death-in-service payment goes to an ex-spouse or a person who no longer reflects their wishes.

Note that nominating your estate (rather than a named individual) on the expression of wishes form is usually inadvisable, because it would bring the benefit into your estate for IHT purposes, removing the tax advantage of the trust structure.

Inheritance tax treatment

Because the benefit is held in trust and the trustees exercise discretion, the lump sum is generally outside the employee’s estate for IHT. This is one of the most significant financial advantages: a £200,000 death-in-service payment held in trust produces no IHT liability, whereas the same sum left under a will and subject to 40% IHT would cost the estate £80,000 in tax.

However, the benefit can fall into the estate — and trigger an IHT charge — if:

• The employee nominates their own estate on the expression of wishes form;
• The scheme is structured as a bare trust and the nominated beneficiary is the employee themselves or their estate;
• In rare cases where the employer is a connected party and HMRC challenges the trust structure.

Always confirm the scheme structure with your employer’s HR or pension team to understand the exact IHT position.

Coordinating death-in-service with your will

Because death-in-service does not pass under your will, you need to think about it separately in your estate plan. Key questions:

Who needs the money most?

Death-in-service is typically paid quickly and free of IHT. It may be best directed at dependants who will need immediate cash — for example, a surviving partner to cover mortgage payments while probate is in progress. Your will can then direct longer-term assets such as property and savings.

Interaction with the nil-rate band

If the benefit bypasses your estate entirely, it does not use up any of your nil-rate band (currently £325,000). This preserves the full NRB to apply against estate assets that are subject to IHT.

Multiple beneficiaries

You can nominate multiple beneficiaries on the expression of wishes form and specify percentages. This allows you to split the lump sum between, for example, a surviving partner and children from a previous relationship — without relying on your will or the partner to redistribute the money.

Death-in-service alongside pension death benefits

Many workplace pension schemes also pay a lump sum on death (a “pension death benefit”). Like death-in-service, this is usually held in trust with a separate nomination form. Pension nominations and death benefits work similarly to death-in-service but have their own rules, particularly around IHT from 2027. Review both nominations together.

What happens if you have no nomination in place?

If you die without submitting a nomination form, the trustees will use their discretion. They will typically make enquiries of your employer and next of kin, then pay the benefit to whoever they consider most appropriate — usually a surviving spouse or civil partner, or failing that, children.

However, this process takes longer than a straightforward nomination and creates uncertainty. In blended family situations, unmarried partnerships, or estranged family arrangements, the trustees may reach a different conclusion from the one you would have wanted. Always complete the nomination form.

Summary

• Death-in-service benefits are usually held in a discretionary trust and do not pass under your will or form part of your estate for IHT.
• The trustees follow your expression of wishes form but are not legally bound by it.
• Review your nomination form whenever your personal circumstances change — especially after marriage, divorce, or the birth of children.
• Do not nominate your own estate on the form; this removes the IHT advantage and slows payment.
• Coordinate your death-in-service nomination with your will, pension nominations, and overall estate plan for the most efficient outcome.