If the individual dies with uncrystallised benefits, these are tested against their remaining lifetime allowance. The personal representatives are then responsible for working out any chargeable amount and reporting this to HMRC. The recipient of the death benefit would then be assessed and be liable for any charge due. This is different from the process applied during the lifetime of the individual where the scheme administrator would deduct any charge and pass this to HMRC.
Ordinarily death benefits would be income tax free on death before age 75. If more than two years passes before they are paid out, then they become liable to income tax at the marginal rate of the beneficiary. If the death benefit is subject to the lifetime allowance but two years passes before the benefit is paid out, income tax will apply instead of the lifetime allowance tax charge.
The scheme administrator can only nominate a beneficiary to receive flexi-access drawdown where there’s no surviving dependant or nominated beneficiary. If there’s a surviving dependant or nominated beneficiary, the scheme administrator wouldn't be able to pay flexi-access drawdown to anyone else; only lump sums could be paid.
On death after age 75, any death benefits are subject to income tax at the marginal rate of the beneficiary. The option to take a PCLS dies with the individual.
As the individual will be taking the discretion away from the scheme administrator, any benefits paid will normally be subject to IHT. If the benefits are left to a spouse or civil partner these will be exempt from IHT.
You can find more information about death benefits in the articles below:
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Fiona has worked in financial services since leaving the University of St Andrews in 1998. She has worked mainly in technical roles although has also worked as a Chartered Financial Planner. She has worked for Royal London since 2015. Fiona is a fellow of the Personal Finance Society and has an MBA from the Open University. She is also the current president of the Insurance Society of Edinburgh.