Lump Sum Death Benefits – Money purchase pensions Print
On death prior to age 75 and prior to taking benefits, a lump sum up to the lifetime allowance of £1,073,100 (limit for 2021/22) or Personal Lifetime Allowance may be paid tax-free. Any funds in-excess of this figure paid as a lump sum will be taxed at 55%. If death occurs post age 75 then any lump sum death benefits within the Lifetime Allowance are subject to income tax in the hands of the beneficiaries at their marginal rate.
There is no test against the lifetime allowance where the death benefits are paid as dependant’s pensions.
Benefits can usually be paid free of inheritance tax subject to a suitable nomination being made or trust established.
On death after vesting, any lump sum death benefits available will depend upon the means used to provide the pension benefits in the first place. The following options may be available:
Secured Income via a Lifetime Annuity will be able to offer lump sum death benefits. For a capital protected annuity this would be the initial capital used to purchase the annuity minus the income already received. Most annuities however are secured without this feature due to cost and instead a minimum guaranteed income payment period is purchased. The balance of this guaranteed period would be payable instead.
Flexi Access Drawdown would pay the remaining fund value within the Lifetime Allowance tax free if death occurs prior to age 75. There is no requirement for the funds to be paid outside of the pension wrapper and a spouse’s/dependant’s drawdown plan can be effected to receive these funds. This would allow the funds to continue to grow virtually tax free and also provide for tax free benefits when drawn. With regard to Inheritance Tax, the funds would also fall outside of the estates of both the deceased and any dependants provided the funds remain within the pension wrapper.
If death occurs post age 75 then the funds can be paid out but are assessable to income tax at the beneficiary’s marginal rate of tax or retained within a spouse’s/ dependant’s drawdown plan and only taxed when benefits are withdrawn. If that beneficiary subsequently dies pre-age 75 then the benefits may be payable again tax free to their dependants.