Death benefits - frequently asked questions

A: Yes. On death before age 75 benefits would pass to the trust without any tax deducted. On death after age 75, the provider will deduct a tax charge of 45% (known as a special lump sum death benefit charge). Beneficiaries can off-set the tax paid on the lump sum death benefit by the scheme administrator against the tax due on this trust payment. This may lead to a refund of tax.

HMRC Pensions Tax Manual PTM073010: Taxable lump sum death benefit payments to a trust - refund of tax to trust beneficiary

A: A lifetime allowance check is made on all remaining uncrystallised funds on death before age 75 as long as the 2-year rule doesn’t apply.

If the plan holder is under age 75 when they die the fund can be passed on completely free from income tax to any nominated beneficiary as a lump sum, drawdown pension or annuity.  Though a dependant’s scheme pension, irrespective of the age at death, is still liable for income tax. A lifetime allowance check will be made on uncrystallised funds, unless they are being used to provide a dependant’s scheme pension, as this is not a benefit crystallisation event. 

If an individual is over age 75 when they die, the tax charge on any income or lump sum payment is at the recipient’s marginal rate of tax.

HMRC Pensions Tax Manual PTM073100: Taxation of a defined benefits lump sum death benefit

HMRC Pensions Tax Manual PTM073200: Taxation of an uncrystallised funds lump sum death benefit
HMRC Pensions Tax Manual PTM073500: How a drawdown pension fund lump sum death benefit is taxed
HMRC Pensions Tax Manual PTM073600: Taxation of a flexi-access drawdown fund lump sum death benefit
HMRC Pensions Tax Manual PTM072110: Death benefits: types of pension: dependants' scheme pension: How a dependants’ scheme pension is taxed

A: Most tax-free lump sum payments, where the individual dies under 75, must be made within two years of the scheme administrator being notified of the death of the individual (or the date the scheme administrator could first reasonably have been expected to know of the individual's death). Any payments to an individual made after the 2-year period is taxed at the recipient's marginal rate of tax, but there is no lifetime allowance test on these payments.

HMRC Pensions Tax Manual PTM073100: Taxation of a defined benefits lump sum death benefit
HMRC Pensions Tax Manual PTM073200: Taxation of an uncrystallised funds lump sum death benefit
HMRC Pensions Tax Manual PTM073500: How a drawdown pension fund lump sum death benefit is taxed
HMRC Pensions Tax Manual PTM073600: Taxation of a flexi-access drawdown fund lump sum death benefit

A: Yes. If the 2-year rule doesn't apply, and an individual’s pension hasn't already been tested against the lifetime allowance when the individual dies, it is tested before being passed on.

HMRC Pensions Tax Manual PTM088100: The benefit crystallisation events (BCEs) in brief - 5C and 5D

A: No, joint-life annuities can be paid out to any beneficiary, if this is agreed when the annuity is bought.  If an individual dies under the age of 75 with either uncrystallised rights or funds in a drawdown pension, a beneficiary's annuity bought with the funds is paid tax-free.

However, the above does not currently apply to scheme pensions. This means that the payment of a dependant's pension paid from a defined benefit scheme will continue to be taxed at the dependant’s marginal rate, regardless of the age of the individual when they died.

Death benefits - nominating beneficiaries FAQs

HMRC Pensions Tax Manual PTM072200: Death benefits: types of pension: beneficiary's annuity
HMRC Pensions Tax Manual PTM072110: Death benefits: types of pension: dependants' scheme pension: conditions

A: No, annuity payments can be guaranteed for any period if this is agreed when the annuity is bought.

HMRC Pensions Tax Manual PTM62400: Guaranteeing a lifetime annuity contract

Note

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. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

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.

 

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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. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.