What happens to a member's pension fund when they die?
Learn what happens to a member's pension fund when they die. The role of the scheme administrator is crucial in deciding who to pay benefits to and how much.
The basic answer to this question is that the Trustee/ Scheme Administrator uses the member’s pension fund (together with any life assurance that the pension Trustees had taken out in relation to the member) to provide the member’s beneficiaries with benefits in accordance with the pension scheme rules and HM Revenue & Customs (HMRC) legislation.
How pension death benefits are paid to beneficiaries
As the Dentons' SIPPs and SSAS pension scheme rules provide for the Trustee/ Scheme Administrator (who in the case of a SSAS is all of the Trustees) to decide, at their absolute discretion, who to pay benefits to and how much, there will normally be no Inheritance Tax consequences in relation to making those benefit payments.
Changes to inheritance tax on pension from April 2027
However, this is due to change from 6 April 2027 under current Government proposals, when most pension scheme death benefits will be brought within scope of Inheritance Tax (IHT) (meaning that both pension and non-pension wealth is included in the deceased's estate and therefore may give rise to an Inheritance Tax charge).
Currently, HMRC might consider applying Inheritance Tax where the member had been in ill health in the two years prior to their death and during those two years:
- greater contributions than usual had been paid to their pension scheme, or
- they had transferred their benefits from one pension scheme to another to get the benefit of more flexible death benefit provisions (e.g. from a defined benefit scheme to a SIPP or SSAS).
Whether there will be any other tax consequences will depend on how old the member was when they died, amongst other factors. Please refer to the Pension Scheme Benefit Allowances guide under Lump sum and death benefit allowance (LSDBA).
Beneficiaries, once selected, can choose in what form they wish to receive benefits.
Funds designated to drawdown from 6 April 2015 onwards, will be through flexi-access drawdown which enables clients to take advantage of the greater freedoms available with no limit on the income levels that can be taken.