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.
For a beneficiary of a Dentons SSAS, or a beneficiary who transfers their funds to a SIPP with Dentons, the following conditions will apply.
The beneficiary should have completed their own nomination form, so that the Trustee/Scheme Administrator can take account of it when using its discretionary powers to pay benefits.
Beneficiary dies before their 75th birthday
Lump sums
Please see our PSBA guide. Lump sums to anyone might be tax-free provided they are paid within two years of the date on which the Trustee/Scheme Administrator was, or ought to have been, aware of the beneficiary’s death.
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 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 or relevant uncrystallised funds
- the beneficiary or original member had included the charity in their nomination form.
Drawdown pensions and annuities
These are payable only to individuals nominated by the beneficiary (and known as the original member’s ‘successors’) and/or a dependant of the original member and are tax-free.
Where there are no successors and no surviving dependants of the original member, the Trustee/Scheme Administrator can provide drawdown pensions and annuities to a successor nominated by the Scheme Administrator.
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 Trustee/Scheme Administrator can provide drawdown pensions and annuities to a successor nominated by the Scheme Administrator.
Lump sums
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 or relevant uncrystallised funds
- the beneficiary or original member had included the charity in their nomination form.
Drawdown pensions
As pension drawdown income can only be paid to individuals, successors 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
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.