7. Death Benefits & Tax Consequences

Question 1

What are the different types of beneficiaries for death benefits?

Answer 1

Dependant:
Member’s widow or civil partner at time of death
Child of member who is <23
Child of member who was dependant on member due to mental or physical impairment at time of death
Person not married / in civil partnership but financially dependent on member OR in a relationship of mutual finaicial dependence with member OR financially dependent due to mental / physical impairment

Nominee:
Any individual other than a dependant who has been nominated by the member to receive benefits on death
If no nomination (either to individual or charity) and no dependants, scheme administrator can make nomination on their behalf

Successor:
Individual nominated by dependant or nomeinee to continue to receive dependant or nominee’s flexi-access drawdown pension
Success can nominate a successor
If a nominee or successor fails to nominate somone, scheme administrator can do so, but only if there are no remaining dependants of member

Question 2

Lump Sum Death Benfefits
What are the tax treatments if:
Member dies before 75
Member dies aged 75 or older
Defined Benefits
Protected lump sum death benefits (scheme pension or annuity)
From drawdown pension (Capped or flexi-acces

Answer 2

Member dies before 75:
If fund designated within 2 year window)
Fund within LTA - Free of tax
Amount > LTA - 55% charge
Outside of 2 year window, entire payment subject to recipient's marginal rate tax (no test for LTA)

Member dies 75 or older
Entire payment subject to tax at recipient’s marginal rate

Defined benefits
Death before 75 and within 2 year window
Tested against LTA (BCE 7) and any excess taxed at 55%, rest tax-free
Outside 2 year window, recipient’s marginal rate
After 75, all at recipient’s marginal rate

Protected Lum Sum Death benefits:
Usually 20 times scheme pension less amount already paid, or fund used to purchase annuity less annuities already paid
<75, no tax payable
>=75 income tax at marginal rate

Drawdown pension (capped or flexi-access)
<75 (within 2 year window) tax free (already tested against LTA)
>75 income tax