The pension freedoms have radically changed the taxation of death benefits payable from money purchase pension schemes and the range of beneficiaries that can receive them.

Where a member dies before their 75th birthday, the remaining funds, subject to Lifetime Allowance limits, can be paid free of tax, either in lump sum form or as an ongoing income. 

Where a member dies on or after their 75th birthday, distribution of the remaining funds will be subject to income tax in the hands of a beneficiary who is an individual and otherwise subject to a tax charge of 45%. 

Recipients of death benefits are selected at the absolute discretion of the pension scheme administrator/trustees who will take guidance from the member’s “form of nomination”.

The trustees have discretion to pay the funds out as a lump sum to anyone, however, it is important to remember, that if the member wants to pay the funds out as Flexi-access drawdown, they can only do so if the individual is either a dependant or has been nominated by the member. If there is no nomination made and no surviving dependants, the trustees can exercise their discretion. For these reasons the member should complete the form of nomination in as such mich detail as possible to include any potential beneficiaries.

It is important to ensure your death benefit nominations are up to date and to review them frequently in light of any change in circumstances to make the most of the planning opportunities provided by these rules. It is also important to review nominations at age 75 as the changes in the taxation of benefits at that point may mean that other beneficiaries may be more appropriate. 

Where funds are allocated to beneficiaries within the pension scheme but have not been fully paid out before the beneficiaries’ own death, the beneficiary can nominate who they wish the funds to be paid to and the recipients are known as “successors”. If the beneficiary dies before their 75th birthday, the benefits to their successors will be tax-free and if they die on or after their 75th birthday, the benefits will be subject to tax at the appropriate rate.

If you would like to find out more about this topic please contact your Financial Adviser or alternatively your Pension Consultant