For information on the current treatment of death benefits see our article Death benefits from April 2015.
This analysis focuses on death benefits both before and after retirement and the range of options available under each situation.
There were a number of factors which affected death benefit provision on an individual's death. These included:
HMRC had a definition of the word 'dependant' and an individual must meet this in order to be paid a dependants pension.
If the individual died after taking their benefits or after the age of 75, there was a tax charge of 55% on any lump sum death benefits paid.
Inheritance tax was not usually payable on lump sum death benefits but, where the scheme administrator had no discretion over the payment, there may have been a liability.
What options are actually available will of course depend on the rules of the relevant pension scheme.
Generally speaking, there were two options available to beneficiaries on the individual's death.
Click on a heading below to learn more:
Whilst there was, in theory, no limit on the amount of lump sum death benefit that could have been provided under a registered pension scheme, the scheme rules still determined what could actually have been 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 would have applied to any lump sum death benefit payable in excess of:
This tax charge, known as the 'lifetime allowance charge', was 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 could be used to provide dependants' pensions without having to pay the charge.
If the individual was younger than 75 at date of death, there was not normally any liability to inheritance tax (IHT) so long as the trustees decided who the lump sum was to be paid to and the lump sum death benefits were not paid to the deceased individual's estate.
If the individual was 75 or over at date of death, the whole lump sum was subject to a 55% tax charge. IHT would not have been payable in addition to this charge, even where the scheme administrator did not decide who to pay the benefits to.
Dependants pensions were not tested against the deceased's or recipient's lifetime allowance, and could be paid on top of any lump sum death benefit. This meant that the value of any benefits above the deceased's lifetime allowance could be used to provide dependants' pensions. If all excess benefits were used in this way the lifetime allowance charge could have been avoided.
In order to be paid a dependant's pension for life, individuals still needed to qualify as 'dependants'. This includes:
Although the options available to the beneficiaries generally fell into one of the above categories, the actual options depended on the individual's circumstances at the time they die.
The following four scenarios show the options that were available to the beneficiaries, depending on the age of the individual when they died and whether or not they had taken their retirement benefits.
Click on a scenario to see the options available to the beneficiaries, and click on an option for further details.
The options that were available to the beneficiaries are shown below. Click on a heading to learn more.
Whilst there was, in theory, no limit on the amount of lump sum death benefit that could have been provided under a registered pension scheme, the scheme rules still determined 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 would have applied to any lump sum death benefit payable in excess of :
This tax charge, known as the 'lifetime allowance charge', was 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 could be used to provide dependants' pensions without having to pay the charge.
So long as the scheme administrator decided who the lump sum death benefit was to be paid to, there was no IHT liability.
Dependant's income could have been secured in two ways. Either by:
Defined benefit schemes could only offer a dependant's scheme pension. Also, money purchase schemes had to offer an open market option if income was 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:
Dependant's lifetime annuity Only a money purchase scheme could provide a dependant's lifetime annuity. To meet the lifetime annuity definition the annuity contract must:
Dependant's income could have been paid in two ways. Either by:
Dependant's income drawdown (ID) The minimum income under dependant's income drawdown (ID) was 0% and the maximum income was 150% of the relevant Government Actuary's Department (GAD) single life annuity rate with no guarantee. Any level of income could have been selected between these limits but this had to be reassessed every 3 years (then every year from age 75). A dependant could request a review at the end of each pension year. The scheme administrator could 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 could be paid as a lump sum subject to a 55% tax charge. No IHT would have been 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 could not have been for more than 5 years.
The options that were available to the beneficiaries are shown below. Click on a heading to learn more.
Whilst there was, in theory, no limit on the amount of lump sum death benefit that could have been provided under a registered pension scheme, the scheme rules still determined what could 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 was not tested against the lifetime allowance.
As the individual was 75 or over at date of death, the whole lump sum was subject to a 55% tax charge.
Dependant's income could be secured in two ways. Either by:
Defined benefit schemes could only offer a dependant's scheme pension. Also, money purchase schemes had to offer open market options if income was 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:
Dependant's lifetime annuity Only a money purchase scheme could provide a lifetime annuity. To meet the lifetime annuity definition the annuity contract must:
Dependant's income could be paid in two ways. Either by:
Dependant's income drawdown (ID) The minimum income under income drawdown (ID) was 0% and the maximum income was 150% of the relevant Government Actuary's Department (GAD) single life annuity rate with no guarantee. Any level of income could have been selected between these limits but this must have been reassessed every 3 years (then every year from age 75). A dependant could request a review at the end of each pension year. The scheme administrator could 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 could be paid as a lump sum subject to a 55% tax charge. No IHT would have been payable in addition.
Short-term annuities Short-term annuities allowed 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 could not be more than 5 years.
The death benefit situation after benefits had been crystallised depended 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 were as follows:
Where a capped drawdown pension was used to crystallise benefits the options available to the deceased's dependants were as follows:
The death benefit situation after benefits had been crystallised depended 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:
Where a capped drawdown pension was used to crystallise benefits the options available to the deceased's dependants are as follows:
If there were no dependants it may have been possible to pay a charity lump sum death benefit, though certain conditions apply.
Dependants pensions did not have a tax-free cash option.
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.