Death benefits overview

Death benefit provision within pension schemes can be complex. 
Key points

There are a number of factors which affect death benefit provision on the member's death. These include

  • Whether or not the member was in receipt of their benefits when they died
  • The type of pension the member was in receipt of (if applicable)
  • The age of the member at date of death.

HMRC have a definition of the word 'dependant' and an individual must meet this in order to be paid a dependants pension.

If the member dies after taking their benefits or after the age of 75, there will be a tax charge of 55% on any lump sum death benefits paid.

Inheritance tax is not usually payable on lump sum death benefits but, where the scheme administrator has no discretion over the payment, there would be a liability.

This analysis focuses on death benefits both before and after retirement and the range of options available under each situation.

What options are actually available will of course depend on the rules of the relevant pension scheme.

Options... at a glance

Generally speaking, there are two options available to beneficiaries on the member's death.

Click on a heading below to learn more:

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, or
  • the fixed lifetime allowance if fixed protection 2012 or fixed protection 2014 has been chosen, or
  • protected lifetime allowance if individual protection 2014 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 relevant lifetime allowance value at a rate of 55%, payable by the recipient of the lump sum.

Any fund in excess of the relevant lifetime allowance 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 to this charge, even where the scheme administrator did not decide who to pay the benefits to.

Dependants pensions are not tested against the deceased's or recipient's lifetime allowance, and can be paid on top of any lump sum death benefit. This means that the value of any benefits above the deceased's lifetime allowance 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.

Different options for different scenarios...

Although the options available to the beneficiaries generally fall into one of the above categories, the actual options depend on the member's circumstances at the time they die.

The following four scenarios show the options available to the beneficiaries, depending on the age of the member when they die and whether or not they have taken their retirement benefits.

Click on a scenario to see the options available to the beneficiaries, and click on an option for further details.

Member dies before taking their benefits and under the age of 75

The options available to the beneficiaries are shown below. Click on a heading to learn more.

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, or
  • the fixed lifetime allowance if fixed protection 2012 or fixed protection 2014 has been chosen, or
  • protected lifetime allowance if individual protection 2014 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 relevant lifetime allowance value at a rate of 55%, payable by the recipient of the lump sum.

Any fund in excess of the relevant lifetime allowance 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 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 an open market option 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 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 150% of the relevant Government Actuary's Department (GAD) single life annuity rate 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.

Member dies before taking their benefits and over the age of 75

The options available to the beneficiaries are shown below. Click on a heading to learn more.

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 lifetime allowance.

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 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 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 150% of the relevant Government Actuary's Department (GAD) single life annuity rate 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.

Member dies after taking their benefits and under the age of 75

The death benefit situation after benefits have been crystallised depends on the way in which benefits were taken. Click on a heading to learn more.

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%.

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.

Member dies after taking their benefits and over the age of 75

The death benefit situation after benefits have been crystallised depends on the way in which benefits were taken. Click on a heading to learn more. 

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%.

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.

A couple of points worth bearing in mind...

If there are no dependants it may be possible to pay a charity lump sum death benefit, though certain conditions apply.

Dependants pensions do not have a tax-free cash option.

Remember once a decision to take benefits has been made it is irreversible and a member cannot change their mind later on.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

In addition, the information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.

Published 7 October 2004

Updated 6 April 2014

Last updated: 15 Oct 2014

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London EC3V 0RL.