Death benefits

Pensions freedoms in 2015 introduced major changes to pension death benefit options and taxation. Here we provide some technical support to help you.

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Major changes to the tax charges that apply to benefits paid on the death of a pension scheme member took effect from 6 April 2015.  This article explains how the funds were treated prior to then. The Finance Act 2013 introduced a change which limits the deductibility of debts in certain circumstances.  Here we explain the changes. On the 6 April 2015 the residence nil-rate band (RNRB) was introduced. This is an additional threshold for inheritance tax (IHT) planning above the current £325,000 threshold. Here we explain how this works. Gifts made to anyone from your client’s estate are exempt from inheritance tax provided they survive for a period of 7 years from the date the gift is made. Here we explain how this works. A spousal bypass trust can be used to stop death benefits falling into the surviving spouse’s estate. Here we explain how this type of trust works.

Read our top five questions

      1. Who pays the lifetime allowance charge when an individual dies?

        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.

      2. On death before age 75 what tax is due if more than two years passes between the provider being aware of the death and the benefits being paid out?

        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 some or all of the death benefit is subject to the lifetime allowance tax charge but two years passes before the benefit is paid out, income tax will apply instead of the lifetime allowance tax charge.

      3. Why is it important to nominate beneficiaries for drawdown?

        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. 

      4. On death after age 75 if there are uncrystallised benefits, what happens to the pension commencement lump sum (PCLS)? 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.
      5. If an individual directs who is to receive any benefits on their death rather than using discretion, are there any inheritance tax (IHT) consequences of doing this?

        As the individual will be taking the discretion away from the scheme administrator/trustee, 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. 


        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.

Watch our webinar and earn CPD hours

60 minutesPensions freedoms in 2015 introduced major changes to pension death benefit options and taxation. Here we provide some technical support to help you, watch out webinar presented by Justin Corliss, Senior Business Development Manager at Royal London.

After watching this webinar, you will be able to:

  • Identify what death benefit choices are available.
  • Explain the taxation of death benefits.
  • Understand the impact of IHT on death benefits.
  • Describe spousal bypass trusts and how they work.

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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.