Lump sums

The scheme administrator can pay lump sums to any selected beneficiary including individuals, trusts, the member's estate and charities.

Drawdown pensions

The scheme administrator can only pay drawdown pensions to the member's dependants and other individuals who have been included in the member's nomination form. Such individuals are 'nominees'.

Annuities

The scheme administrator can only buy annuities from an insurance company for the member's dependants and nominees.

Where the member had no surviving dependants or nominees, the scheme administrator can pay drawdown pensions or buy annuities for individuals chosen by the scheme administrator.

What are the tax consequences of providing benefits?

There may be no tax consequences if the member dies before their 75th birthday. However, if they die on or after their 75th birthday, there will be tax consequences.

Member dies before their 75th birthday.

Lump sums

Unless any of the member's remaining pension funds are subject to a lifetime allowance charge, lump sum payments, whether from uncrystallised funds or drawdown funds (also known as crystallised funds) will be tax-free, provided the member is under 75 at the date of death and the funds are paid within two years of the date on which the scheme administrator was, or ought to have been, aware of the member's death.

Uncrystallised funds are those that the member had not designated to provide retirement benefits.

Drawdown funds are those that the member had already designated to provide retirement benefits.

Lump sums not paid within the two-year period cannot be subject to a lifetime allowance charge but they are taxable at the rate relevant to the recipient:

  • where the recipient is an individual - at their relevant income tax rate
  • where the recipient is an entity such as a trust, the member's estate or a charity - at the special tax rate of 45%.

A trust may be able to claim back some of this 45% tax charge when it makes a subsequent payment to a beneficiary of that trust, depending on the beneficiary's marginal rate of tax.

A charity will be exempt from the 45% tax charge if the payment qualifies as a 'charity lump sum death benefit', the conditions for which are:

  • there are no dependants of the member
  • the payment is made from drawdown funds
  • the member included the charity in their nomination form.

Drawdown pensions

Unless the member's remaining pension funds are subject to a lifetime allowance charge, drawdown pension payments to beneficiaries from the pension scheme will be tax-free, as long as the member is under age 75 at the time of death and the beneficiaries have designated the funds as beneficiary drawdown funds within two years of the date on which the scheme administrator was, or ought to have been, aware of the member's death.

Annuities

Unless the member's remaining pension funds are subject to a lifetime allowance charge, annuity payments by an insurance company to beneficiaries will be tax-free, as long as the member is under age 75 at the time of death and the annuities have been bought within two years of the date on which the scheme administrator was, or ought to have been aware of the member's death.

Member dies on or after their 75th birthday


Lump sums, drawdown pensions and annuities to individuals, are taxable at the individual's relevant rate of income tax.

Lumps sums, to entities such as a trust, the member's estate or a charity, are taxable at the special tax rate of 45%.

A charity will be exempt from the 45% tax charge if the payment qualifies as a 'charity lump sum death benefit', the conditions for which are:

  • there are no dependants of the member
  • the payment is made from drawdown funds
  • the member included the charity in their nomination form.

Please note: If the member had deferred their tax-free retirement lump sum (also known as a 'pension commencement lump sum') until after their 75th birthday and died before taking it, the tax-free lump sum would no longer be available and would remain part of the pension fund for distribution to the member's beneficiaries in accordance with the above rules.