Adviser > Individual > Drawdown > Death
Death
What is payable on death?
Death benefits are dependent on whether your client has crystallised or uncrystallised funds.
Uncrystallised benefits
Benefits can be taken in three ways:
- lump sum/return of fund (subject to a 55% tax charge if the client is over age 75)
- dependant(s) pension
- a combination of lump sum(s) and dependants pension.
* Inheritance tax may be levied if HMRC deem that the pension plan has been used to avoid this tax, however HMRC have confirmed that this will not happen in the majority of cases.
If your client has uncrystallised funds on death after age 75, any lump sum benefits would be subject to a Recovery Tax Charge of 55%.
Crystallised benefits
Where drawdown income was used to crystallise benefits the options available to the deceased's dependants are as follows:
- a lump sum subject to a 55% tax charge or
- lifetime annuity, or
- income drawdown, based on the age of the spouse plus GAD rates applicable at the date of designation.
Alternative options:
In the event of death where there are no qualifying dependants it is possible to pay the value of the plan to a registered charity nominated by the member or the dependant.
It is possible to pay a retirement income to, or purchase an annuity for any financial dependants. Please note that Protected Rights funds have to provide a dependant's pension to any surviving spouse or civil partner.
Your client may choose to partially crystallise their funds in which case the above options will apply separately to the relevant proportion of the plan.
For more information on death benefits, have a look at our Income Drawdown leaflet on Death Benefits.
My client is in ill-health and is coming up to the selected pension age for his plan. He intends on not crystallising his plan at that time. Will there be any tax consequences?
Until recently, if someone who knew they were in ill-health delayed taking their retirement benefits and subsequently died, the death benefits could be subject to inheritance tax (IHT). However, the Finance Act 2011 provided that where taking benefits is delayed IHT will not be levied on subsequent death, even where the member knew they were in ill-health.
How does spousal by-pass work?
Spousal by-pass is a standalone trust set up to accept lump sum pension death benefits to minimise the impact of IHT for your heirs.
Steps involved in creating the trust:
- A trust – is set and nominated to receive the benefits on the first death, with the children as potential beneficiaries.
- Loan – the trustees can make a loan to the spouse to cover any short term needs.
- Second death – when the spouse dies the trust must be wound up and the assets distributed to the remaining beneficiaries (including the value of the loan which will be repaid from the deceased spouse's estate).
Benefits
The pension fund has been kept out of the spouse's estate, with the remaining estate being further reduced by the value of the loan, resulting in an even lower liability for inheritance tax.
For further details on death benefits and in particular how the spousal by-pass works, take a look at our Income Drawdown leaflet on Death Benefits.
If my client dies while still legally married, what happens to the protected rights fund?
If your client dies while still legally married (separated or not) or in a civil partnership, the protected rights funds must be used to provide a spouse's pension. However, this pension may be provided via income drawdown which preserves the fund on second death (subject to a 55% tax charge).
For professional advisers only
