What benefits can the scheme administrator provide?

Types of benefits that the Trustee/Scheme 

The Trustee/Scheme Administrator can provide lump sums and drawdown pensions and buy annuities from insurance companies.

Administrator can provide

1. Lump sums - The Trustee/Scheme Administrator can pay lump sums to any selected beneficiary including individuals, trusts, the member’s estate and charities.
2. Drawdown pensions - Drawdown pensions can be provided to the member’s dependants and other individuals who have been included in the member’s nomination form. Such individuals are ‘nominees’. However, where a nomination has not been made, drawdown pensions can be paid to a spouse or other dependant, or if there are none, the Scheme Administrator can nominate who receives the drawdown pension. A SIPP beneficiary who opts for a drawdown pension must transfer their drawdown funds to another pension scheme either with Dentons or another provider.
3. Annuities - The Trustee/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 Trustee/Scheme Administrator can 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. Please see our PSBA guide. However, if they die on or after their 75th birthday, there will be tax consequences.

Member dies before their 75th birthday

Lump sums

These are tax free, provided that they are within the member's available lump sum and death benefit allowance (LSDBA) and that 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.

Any monies in excess of the LSDBA which are paid as a lump sum death benefit will be taxed at the beneficiary's marginal rate of tax when they receive the benefits. If, however, the beneficiary takes the excess over the LSDBA as beneficiary's income drawdown payments, these payment will be tax fee in the hands of the beneficiary.

Lump sums not paid within the two-year period 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 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 or relevant uncrystallised funds (i.e. funds not designated to drawdown) 
• the member included the charity in their nomination form.

Drawdown pensions

If a SIPP beneficiary has opted for pension drawdown income and transferred those benefits to their own SIPP or SSAS with Dentons, the beneficiary can indicate how they would like the Trustee/Scheme Administrator to distribute any of those benefits remaining when he or she dies.

Drawdown pension payments to beneficiaries will be tax-free, as long as the member is under age 75 at the time of death and provided that where the member’s remaining pension funds include ‘unused uncrystallised funds’, the beneficiary designates them as 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

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

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

Lump sums to entities such as a trust, the member’s estate or a charity, are taxable at the special 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 or relevant uncrystallised funds 
• the member included the charity in their nomination form.

Drawdown pensions

As pension drawdown income can only be paid to individuals, beneficiaries who opt for flexi-access drawdown would need to transfer their funds to an existing pension scheme of which they are a member, or establish a new pension scheme (either with Dentons or another provider that can accept such funds).

Such pension drawdown income payments are assessable income for tax purposes.

Annuities

Alternatively, they can use their funds to buy a pension income in the form of an annuity with another provider.

The Trustee/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 Trustee/Scheme Administrator can buy annuities for individuals chosen by the Scheme Administrator.

Such pension income payments from an annuity are assessable income for tax purposes.

Please note: If the member had deferred their entitlement to 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.

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