Types of beneficiaries
A dependant is a person who, at the date of the member’s death was:
- Their spouse or civil partner.
- The child of the member under 23, or if age 23 or over who is dependent upon the member due to physical or mental impairment.
- A person who was financially dependent on the member, in a relationship of mutual dependence with them or was dependent upon them due to physical or mental impairment.
A nominee can be anyone nominated by the member.
A successor can be anyone nominated by a dependant, nominee or successor to receive any remaining benefits on their death.
The scheme administrator has discretion as to how any death benefits are paid, and can make lump sum death benefit payments to any individual.
Following the death of a member who has not made a nomination and does not have any dependants, the scheme administrator can nominate a nominee to receive an income from the fund.
Following the death of a dependant, nominee or successor who has not made a nomination, the scheme administrator can nominate a successor to receive an income from the fund. Alternatively, if there are any surviving dependants of the original member, the scheme administrator can use its discretion to pay death benefits to them.
Under the death benefit rules it is possible for pension death benefits to be passed on within a pension environment for generations if the funds are not fully withdrawn.
A true charity lump sum death benefit is not subject to tax, and is not tested against the lifetime allowance. However it can only be paid where both of the following conditions are met:
- there are no dependants of the member; and
- the member has nominated the charity as a beneficiary
If the member leaves no dependants, but hasn’t nominated a charity, the payment won’t meet the conditions, as would also be the case if the member had nominated a charity but there is a dependant.
Death benefits taxation
If the deceased is under 75 and funds are designated to their beneficiary within two years, the payments will be free of tax, whether taken as a lump sum or flexi-access drawdown.
On the death of someone who is receiving a beneficiary pension (as a dependant, nominee or successor) it will be their age at death, not that of the original member, that determines whether the benefits are taxable.
The two-year time limit for designating funds to the next beneficiary begins with the earlier of:
- the day that the scheme first knew of the deceased’s death; and
- the day the scheme could first reasonably have been expected to have known of it.
If benefits are not designated within the two-year period stated above, then benefits will usually be taxed.
If the benefits are taxable and the beneficiary takes a lump sum, tax will apply at the recipient’s marginal rate of income tax, or if paid to a trust will be subject to tax at 45%.
Any benefits taken as a pension income will be subject to the recipient’s marginal rate of income tax.
Lifetime allowance test
Death benefits are only tested against the lifetime allowance when they are paid from uncrystallised funds on the death of a member before age 75 and designated within the two-year time limit.