TECHNICAL BRIEFING: DEATH BENEFITS
Contributed by MW Pensions
22 May, 2012
Contributed by MW Pensions. [www.mwpensions.co.uk]
Death before drawing retirement benefits
If the member dies before taking any retirement benefits (and if they just take a tax free cash sum that means they are treated as having taken retirement benefits), the whole of the uncrystallised fund can usually be paid as an uncrystallised funds lump sum death benefit. It is paid free of Inheritance Tax. The Trustees decide who receives the benefit (it has to be at the discretion of the Trustees' to ensure that there will be no liability to IHT). Normally the Trustees will pay the lump sum to those nominated on the members Expression of Wish form.
It must be paid within two years of the members death.
Alternative options, although rarely taken up, are for the whole fund to be used to provide
a) a potentially taxable drawdown pension from the assets to the dependants, or
b) an annuity could be purchased for the spouse or dependants.
Payment of an uncrystallised funds lump sum death benefit is a benefit crystallisation event that triggers a test against the members available lifetime allowance. Where the payment is less than the members available lifetime allowance the uncrystallised funds lump sum death benefit can be paid tax free.
Where the payment is more than the members available lifetime allowance the amount of the uncrystallised funds lump sum death benefit that is over the members available lifetime allowance will be a chargeable amount. A chargeable amount will give rise to a lifetime allowance charge at the rate of 55%. This charge falls on the recipient of the payment.
Death whilst in receipt of income drawdown
There are four options available:
1. The fund can be paid as an unsecured pension fund lump sum death benefit, less 55% tax.
2. The spouse or dependants could continue with taxable income drawdown. On the death of the last surviving spouse/dependant the residual fund at that time is subject to tax of 55%
3. The fund can be used to purchase an annuity for the surviving spouse or dependant(s)
4. A lump sum payment could be made to a pre-nominated charity, tax free
A combination of the above options is possible for example 20% could be paid out tax free to a pre-nominated charity (or charities) and 80% could be paid out as a taxable (55%) unsecured lump sum death benefit.
There is no time limit as to when an unsecured pension fund lump sum death benefit can be paid following the death of the member.
Death whilst in phased retirement
Phased Retirement is the term used to describe partial drawdown of funds. A member may be in a situation where just a small amount of retirement income is needed, perhaps because they are still in some sort of employment. In this case, a proportion of the segments will be "crystallised" for retirement purposes.
If the member has opted to take Phased Retirement, the "crystallised" segments are dealt with as described under the four options above for Death whilst in Income Drawdown and the remaining "uncrystallised" segments are distributed in the same manner as used for Death before Drawing Retirement Benefits.
Who decides who gets any lump sum payment on my death?
The Trustees will have this responsibility
A dependant means:
1. A person who was married to the member at the date of the members death
2. A child of the member is a dependant of the member if the child has not reached the age of 23, or having reached age 23, in the opinion of the scheme administrator, was at the date of the members death dependent on the member because of physical or mental impairment.
3 A person who was not married to the member at the date of the members death and is not a child of the member, is a dependant of the member if, in the opinion of the scheme administrator, at the date of the members death, the person was financially dependant
We do not give financial advice. nor do we advise on the suitability of a SIPP. No comments here are intended as such. The above information is based on our understanding of the legislation governing pensions at the time of writing. Before taking any action you should consult a qualified financial and/or tax adviser. Levels, bases of and reliefs from taxation may be subject to change.
This leaflet is intended for professional advisors only, not members of the general public
Authorised and Regulated by the Financial Services Authority
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