What happens when a beneficiary with drawdown funds dies?
Learn what happens when a beneficiary of a pension in drawdown dies and the difference between the member dying before and after their 75th birthday.
Beneficiary dies before their 75th birthday
Lump sums to anyone are tax-free provided they are paid within two years of the date on which the scheme administrator was, or ought to have been aware of the beneficiary's death.
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 beneficiary'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 original member
- the payment is made from drawdown funds
- the beneficiary or original member had included the charity in their nomination form.
Drawdown pensions and annuities - payable only to individuals nominated by the beneficiary (and known as the original member's 'successors'), or a dependant of the original member, are tax-free.
Where there are no successors and no surviving dependants of the original member, the scheme administrator can provide drawdown pensions and annuities to a successor nominated by the scheme administrator.
There are no lifetime allowance issues.
Beneficiary 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.
Where there are no successors and no dependants of the original member, the scheme administrator can provide drawdown pensions and annuities to a successor nominated by the scheme administrator.
Lump sums to entities such as a trust, the beneficiary'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 original member
- the payment is made from drawdown funds
- the beneficiary or original member had included the charity in their nomination form.