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.
Where an uncrystallised funds lump sum death benefit is paid, the lifetime allowance charge on any excess funds is at the rate of 55 per cent.
Where uncrystallised funds are used to provide a pension, they are providing an income so the lifetime allowance charge on the excess fund will be 25 per cent.
Although the benefits are tested against the deceased’s lifetime allowance (and does not use any of the recipient’s own LTA) it is the recipient who is responsible for any liability.
If the deceased had lifetime allowance protection this can be used to reduce or eliminate any lifetime allowance charge.
The scheme administrator must confirm to the representative the amount and date of any lump sums paid in relation to the member’s death and the percentage of standard lifetime allowance that the member had used up.
However, the deceased member’s personal representative has responsibility for establishing whether any lifetime allowance charge is due.
Spousal bypass trust
It is possible for death benefits to be paid into a discretionary bypass trust, often called a spousal bypass trust (SBT).
