Death Benefit Rules for Investment Based Pensions

Changes to the flexibility and the tax charges that apply to benefits paid on the death of a pension scheme member took effect from 6^th April 2015. These are briefly outlined below:

	Death before age 75	Death above age 75
Crystallised in drawdown (where the lump sum has been taken)	The benefits will be paid completely tax-free whether taken as a lump sum or flexi-access drawdown. If benefits are not designated to a beneficiary within two years, then they will be subject to tax if taken as a lump sum, but tax-free if taken as income.	The benefits will be subject to tax at the beneficiaries’ marginal rate whether taken as a lump sum or as a drawdown pension. The fund can also be paid to a trust as a lump sum but will incur a 45% tax charge. Later distributions from the trust receive a tax credit in respect of the 45% tax already paid, which can be offset against the recipient’s other income in the tax year.
Uncrystallised funds(where no benefits have been taken to date)	The benefits will be paid completely tax-free whether taken as a lump sum or flexi-access drawdown. The benefits will be tested against the deceased’s lifetime allowance. If benefits are not designated to a beneficiary within two years, then they will be subject to tax at the recipient’s marginal rate and will not be tested against the lifetime allowance.	The benefits will be subject to tax at the beneficiaries’ marginal rate whether taken as a lump sum or as a drawdown pension. The fund can also be paid to a trust as a lump sum but will incur a 45% tax charge. Later distributions from the trust receive a tax credit in respect of the 45% tax already paid, which can be offset against the recipient’s other income in the tax year.
Lifetime Annuities	Beneficiary can receive the payments tax-free.	Beneficiary can receive the payments taxed at their marginal rate.

Death before age 75

Death above age 75

Crystallised in drawdown (where the lump sum has been taken)

The benefits will be paid completely tax-free whether taken as a lump sum or flexi-access drawdown.

If benefits are not designated to a beneficiary within two years, then they will be subject to tax if taken as a lump sum, but tax-free if taken as income.

The benefits will be subject to tax at the beneficiaries’ marginal rate whether taken as a lump sum or as a drawdown pension.
The fund can also be paid to a trust as a lump sum but will incur a 45% tax charge. Later distributions from the trust receive a tax credit in respect of the 45% tax already paid, which can be offset against the recipient’s other income in the tax year.

Uncrystallised funds(where no benefits have been taken to date)

The benefits will be paid completely tax-free whether taken as a lump sum or flexi-access drawdown.

The benefits will be tested against the deceased’s lifetime allowance.

If benefits are not designated to a beneficiary within two years, then they will be subject to tax at the recipient’s marginal rate and will not be tested against the lifetime allowance.

The benefits will be subject to tax at the beneficiaries’ marginal rate whether taken as a lump sum or as a drawdown pension.

The fund can also be paid to a trust as a lump sum but will incur a 45% tax charge. Later distributions from the trust receive a tax credit in respect of the 45% tax already paid, which can be offset against the recipient’s other income in the tax year.

Lifetime Annuities

Beneficiary can receive the payments tax-free.

Beneficiary can receive the payments taxed at their marginal rate.

These rules do not apply to defined benefit pensions. A dependant’s pension paid from a defined benefit scheme will continue to be taxed at the dependant’s marginal rate.