It was 30 September 2014 when the major overhaul of the death benefits for money purchase pensions was announced.
It was a shock to many, and when the full details came out confirming the headline it is safe to say many were surprised. The link between crystallised benefits and large death benefit tax charges was removed and only the age barrier of 75 remained. However, there can still be additional charges on uncrystallised funds if they take the members’ benefits over the lifetime allowance, and some new benefit crystallisation events have been brought in to deal with this.
Capped/flexi-access drawdown or uncrystallised funds
This is where the freedoms have had the most impact – the value of the pension fund at the date of death will be payable to the beneficiaries. There are no restrictions on the number of beneficiaries or who they can be.
So now it is possible to nominate any beneficiary and they will be a dependant, a nominee or a successor. A nominee is someone who is nominated but not actually dependent on the member and a successor is nominated by the beneficiary prior to her death. The beneficiary can choose how she wants to take the benefits, including:
• A lump sum payment from the scheme;
• Flexi-access drawdown;
• An annuity or
• A scheme pension.
The legislation on beneficiaries’ drawdown has been written in such a way that should a nomination not have been made, then the scheme administrator must pay any flexi-access drawdown to a dependant if there is one. This rule only applies to the beneficiary’s flexi-access and not lump-sum payments, so should the dependant not actually want or need the income or lump sum, it can be paid as a lump-sum death benefit to another person. This really shows the importance of nominations being kept up-to-date.
Money purchase scheme pension
Any benefit payable will depend upon the basis of the scheme pension and how long it has been in force. Any remaining funds can be used to provide benefits in just the same way as drawdown above.
Annuity (lifetime, fixed-term or investment-linked)
Whether there is any benefit entitlement will depend on the basis of how the annuity was set up, including how long the annuity was in force at the time of death. Annuities purchased after 5 April 2015 may be able to offer additional options when determining who the benefits can be paid to.
The taxation of the beneficiary’s income or lump sum is determined by the age at date of death of the member, or if a second death, the beneficiary. This means that benefits can initially be taxed on first death and become tax-free on second or third death if the beneficiary should die before she reaches 75.
Beneficiaries’ flexi-access drawdown
Generally, if the member or beneficiary dies before the age of 75, the beneficiary’s flexi-access drawdown is paid tax-free. However, if the designation is made after two years and from uncrystallised funds, then any income paid will be subject to income tax at the beneficiary’s marginal rate