Death benefits

1. Lump sum

Whilst there is, in theory, no limit on the amount of lump sum death benefit that can be provided under a registered pension scheme, the scheme rules will still determine what can actually be paid out in terms of death benefits. For example scheme rules could allow four times salary as a lump sum death benefit or simply a return of fund. It's important to note that a tax charge will apply to any lump sum death benefit payable to a member younger than 75 at date of death in excess of :

• the standard lifetime allowance (SLA), or
• the personal lifetime allowance (PLA) if primary protection has been chosen, or
• the 'benefits value' (e.g. fund value) if enhanced protection has been chosen.

This tax charge, which is known as the ‘lifetime allowance charge’, will be applied to any excess lump sum death benefit over the SLA/PLA/benefits value at a rate of 55%, payable by the recipient of the lump sum.

Any fund in excess of SLA can be used to provide dependants' pensions without having to pay the charge.

If the member was younger than 75 at date of death, there is not normally any liability to inheritance tax (IHT) so long as the trustees decide who the lump sum should be paid to and the lump sum death benefits are not paid to the deceased member’s estate.

If the member was 75 or over at date of death, the whole lump sum will be subject to a 55% tax charge. IHT would not be payable in addition even where the scheme administrator did not decide who to pay the benefits to.

2. Dependants pensions

Dependants pensions are not tested against the deceased’s or recipient's SLA or PLA, and can be paid on top of any lump sum death benefit. This means that the value of any benefits above the deceased's SLA or PLA can be used to provide dependants' pensions. If all excess benefits are used in this way the lifetime allowance charge can be avoided.

In order to be paid a dependant's pension for life, individuals still need to qualify as 'dependants’. This includes:

• legally married spouse or civil partner,
• unmarried partner (a ‘common-law’ husband or wife or someone of the same sex) can be treated as a dependant, where the relationship was one of financial dependence on the member or financial interdependence,
• children – under the age of 23 or older in the case of dependency due to mental or physical incapacity,
• ex-spouse if they were married to the member when they first started to take the pension,
• and any other person that the scheme administrator considers dependent on the deceased at the time of death due to physical or mental impairment, or financial dependency or that there was financial interdependence between that person and the member.

Lump sum

Whilst there is, in theory, no limit on the amount of lump sum death benefit that can be provided under a registered pension scheme, the rules will still determine what can actually be paid out in terms of death benefits. For example scheme rules could allow four times salary as a lump sum death benefit or simply a return of fund. But it's important to note that a tax charge will apply to any lump sum death benefit payable at date of death in excess of :

• the standard lifetime allowance (SLA), or
• the personal lifetime allowance (PLA) if primary protection has been chosen, or
• the 'benefits value' (e.g. fund value) if enhanced protection has been chosen.

This tax charge, which is known as the ‘lifetime allowance charge’, will be applied to any excess lump sum death benefit over the SLA/PLA/benefits value at a rate of 55%, payable by the recipient of the lump sum.

Any fund in excess of SLA can be used to provide dependants' pensions without having to pay the charge.

So long as the scheme administrator decides who the lump sum death benefit is to be paid to, there will be no IHT liability.

Dependant's secured pension

Dependant's income can be secured in two ways. Either by:

• buying a dependant's scheme pension, or
• buying a dependant's lifetime annuity.

Defined benefit schemes can only offer a dependant's scheme pension. Also, money purchase schemes have to offer open market options if income is to be secured by an annuity.

Dependant's scheme pension
A scheme pension may be provided under both a defined benefit or a money purchase scheme. To be a scheme pension the pension:

• must be paid for the life of the dependant,
• must be paid at least annually,
• must not be capable of being reduced year on year,
• must be paid by the scheme administrator or by an insurance company chosen by the scheme administrator,
• and may be guaranteed for a set period of no more than ten years.

Dependant's lifetime annuity
Only a money purchase scheme can provide a dependant's lifetime annuity. To meet the lifetime annuity definition the annuity contract must:

• be purchased from an insurance company of the dependant's choice,
• be payable for life,
• be paid at least once a year, either in advance or in arrears,
• stay level or increase,
• not allow the payment of a capital sum triggered by the dependant’s death, apart from annuity protection,
• and not be capable of being assigned or surrendered, unless there is a pension sharing order.

Dependant's capped drawdown pension

Dependant's income can be paid in two ways. Either by:

• income drawdown, or
• short-term annuities.

Dependant's income drawdown (ID)
The minimum income under dependant's income drawdown (ID) is 0% and the maximum income is 120% of the relevant Government Actuary's Department (GAD) single life annuity rate based on gender with no guarantee. Any level of income can be selected between these limits but this must be reassessed every 3 years (then every year from age 75). A dependant can request a review at the end of each pension year. The scheme administrator can grant or refuse this request at their discretion. Our article on Income drawdown and review dates provides more information.

Should the dependant die under ID any remaining fund not used to provide income can be paid as a lump sum subject to a 55% tax charge. No IHT would be payable in addition.

Short-term annuities
Short-term annuities allow a dependant to buy an annuity, or a series of annuities (on the open market, if required), with all or part of their fund. The annuity term cannot be more than 5 years.

Lump sum

Whilst there is, in theory, no limit on the amount of lump sum death benefit that can be provided under a registered pension scheme, the rules will still determine what can actually be paid out in terms of death benefits. For example scheme rules could allow four times salary as a lump sum death benefit or simply a return of fund. The lump sum death benefit is not tested against the LTA.

As the member was 75 or over at date of death, the whole lump sum will be subject to a 55% tax charge.

Dependant's secured pension

Dependant's income can be secured in two ways. Either by:

• buying a dependant's scheme pension, or
• buying a dependant's lifetime annuity.

Defined benefit schemes can only offer a dependant's scheme pension. Also, money purchase schemes have to offer open market options if income is to be secured by an annuity.

Dependant's scheme pension
A scheme pension may be provided under both a defined benefit or a money purchase scheme. To be a scheme pension the pension:

• must be paid for the life of the dependant,
• must be paid at least annually,
• must not be capable of being reduced year on year,
• must be paid by the scheme administrator or by an insurance company chosen by the scheme administrator,
• and may be guaranteed for a set period of no more than ten years.

Dependant's lifetime annuity
Only a money purchase scheme can provide a lifetime annuity. To meet the lifetime annuity definition the annuity contract must:

• be purchased from an insurance company of the dependant's choice,
• be payable for life,
• be paid at least once a year, either in advance or in arrears,
• stay level or increase,
• not allow the payment of a capital sum triggered by the dependant’s death, apart from annuity protection,
• and not be capable of being assigned or surrendered, unless there is a pension sharing order.

Dependant's capped drawdown pension

Dependant's income can be paid in two ways. Either by:

• dependant's income drawdown, or
• dependant's short-term annuities.

Dependant's income drawdown (ID)
The minimum income under income drawdown (ID) is 0% and the maximum income is 120% of the relevant Government Actuary's Department (GAD) single life annuity rate based on gender with no guarantee. Any level of income can be selected between these limits but this must be reassessed every 3 years (then every year from age 75). A dependant can request a review at the end of each pension year. The scheme administrator can grant or refuse this request at their discretion. Our article on Income drawdown and review dates provides more information.

Should the dependant die under ID any remaining fund not used to provide income can be paid as a lump sum subject to a 55% tax charge. No IHT would be payable in addition.

Short-term annuities
Short-term annuities allow a dependant to buy an annuity, or a series of annuities (on the open market, if required), with all or part of their fund. The annuity term cannot be more than 5 years.

Death whilst in receipt of a secured pension

Where a secured pension was used to crystallise benefits the options available to a deceased’s dependants are as follows:

• if the annuity was purchased with an attaching dependants pension this would be payable for the remainder of the dependant's life, or
• if the annuity was purchased with a guarantee period (maximum 10 years) pension instalments will continue until the end of any guaranteed period, or
• pension protection - a lump sum death benefit payment based on the difference between the annuity purchase price when secured pension was selected and the income payments made to date of death taxed at 55%.

Death whilst in receipt of a capped drawdown pension

Where a capped drawdown pension was used to crystallise benefits the options available to the deceased’s dependants are as follows:

• continue income drawdown, or
• buy dependant's short term annuities, or
• buy a dependant's lifetime annuity, or
• any remaining fund not used to provide income can be paid as a lump sum subject to a 55% tax charge.

Death whilst in receipt of a secured pension

Where a secured pension was used to crystallise benefits the options available to a deceased’s dependants are as follows:

• if the annuity was purchased with an attaching dependants pension this would be payable for the remainder of the dependant's life, or
• if the annuity was purchased with a guarantee period (maximum 10 years) pension instalments will continue until the end of any guaranteed period, or
• pension protection - a lump sum death benefit payment based on the difference between the annuity purchase price when secured pension was selected and the income payments made to date of death taxed at 55%.

Death whilst in receipt of a capped drawdown pension

Where a capped drawdown pension was used to crystallise benefits the options available to the deceased’s dependants are as follows:

• continue income drawdown, or
• buy dependant's short term annuities, or
• buy a dependant's lifetime annuity, or
• any remaining fund not used to provide income can be paid as a lump sum subject to a 55% tax charge.