PENSION DEATH BENEFITS What happens to my personal pension pot upon my death? A common misconception with pensions is that they cease to exist on death. However, when you die, your personal pension scheme could provide benefits to your financial dependents or your estate. These are known as death benefits. Exactly what benefits your dependents or nominees will receive when you pass away will depend on the type of pension scheme that you have. However, this article is going to focus on the death benefits applicable to Money Purchase pensions. A money purchase scheme (also known as defined contribution) is a scheme where the final value depends on the amount of contributions made by the member, their employer and any third party. the performance of the investments underlying the scheme. Death benefit options When an individual dies with funds in a money purchase pension scheme, the trustees or scheme administrators will normally have discretion over who receives death benefits. It is always sensible for a member to complete a nomination form, as this will give the trustees guidance on who you wanted to benefit from the residual pension. There is a range of ways in which death benefits can be provided for beneficiaries. The choice is not necessarily all or nothing - the same pension pot may provide benefits in different ways. These include: • • • • 08
lump sum income drawdown lifetime annuity dependant’s scheme pension
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Whilst legislation dictates the options that are available, the options for individuals may be limited by the scheme rules. For example, not all schemes can facilitate income drawdown and very few defined contribution schemes would allow a dependant’s scheme pension. Therefore, it is extremely important to ensure your pension offers the death benefit flexibility that you would like. Lump sums to individuals Any remaining funds in a money purchase pension on the death of the original member, or a beneficiary who had inherited a pension, may be paid as a lump sum. The amount of the lump sum will be the value of the fund immediately before the date of death. Taxation - lump sum The tax treatment of death benefit lump sums largely depends upon whether the pension scheme member died before or after reaching age 75. Lump sums paid to an individual are generally tax free where the member died before 75. To be tax free the lump sum needs to be: • paid within two years of the scheme administrator becoming aware of the death and • for uncrystallised rights only, within the deceased member’s available lifetime allowance (LTA)*. LTA is the total amount of pension benefits that can be accrued within a pension fund in a tax efficient manner. The current LTA for the 2021/22 tax year is £1,073,100. Any lump sum above the deceased member’s available LTA will face a 55% LTA tax charge. *
