Navigating pension death benefits

Prior to these changes, pension death benefits could only be passed on within a pension to dependants or paid out as a lump sum to other beneficiaries.

Under these circumstances, the lump sum option was subject to a tax charge of 55 per cent if benefits were crystallised, or the deceased was over 75-years-old.

The changes were aimed at making pension death benefits more flexible and allowing individuals more choice in how their pension pot is distributed after their death.

One of the main changes was the introduction of nominee’s flexi-access drawdown.

Death benefits do not have to all be taken in the same way.

This allows any nominated beneficiary to keep their inherited funds within a pension.

Where the deceased was under 75 this will be tax-free (subject to available lifetime allowance), and where the deceased was over 75 then the beneficiary just pays income tax on withdrawals. 

This article sets out the position in respect of legislation applying under current rules for deaths on or after April 6 2015 for defined contribution pension schemes.

Pension or lump sum

Only certain payments are authorised payments after the death of a member. In general, there are two types of benefits that can be paid: pension death benefits and lump sum death benefits.

The following are authorised pension payments that can be made following the member’s death:

• beneficiary’s flexi-access drawdown;
• dependant’s scheme pension;
• beneficiary’s annuity.

Before April 6 2015, only a dependant could receive an annuity or drawdown as an authorised pension payment on death. Since April 6 2015, annuities and drawdown can also be paid to a nominee or a successor in addition to a dependant.

In theory the pension fund could be passed on for generations if it is not all taken out.

There are various authorised lump sum death benefits that can be paid, and each has a different set of conditions and characteristics, with the type of lump sum varying depending on the type of scheme it is being paid from.

Death benefits do not have to all be taken in the same way.

A beneficiary could choose to take some of the fund as a lump sum, use some to purchase an annuity, and the rest to go into flexi-access drawdown.

There is no limit on the number of beneficiaries, and different beneficiaries can choose to take their benefits in different ways.

Eligible beneficiaries

An individual who inherits a pension fund is called a beneficiary.

There can be more than one beneficiary, and the way in which beneficiaries are determined depends on the rules of the scheme.