This guide is for financial advisers only. It mustn't be distributed to, or relied on by, customers. It's based on our understanding of legislation as at 6 April 2024.
Registered pension schemes can pay a variety of benefits on the death of a member and on the subsequent death of a dependant, nominee or successor. The type of benefit that can be paid will depend on whether the payment is from uncrystallised or crystallised funds. It will also depend on the type of pension arrangement the member’s benefits are held in, the scheme rules or the product’s terms and conditions.
This guide covers the death benefits that are currently allowable under the legislation from registered money purchase pension schemes. It doesn’t cover the death benefit rules for defined benefit schemes, nor does it cover the treatment of contracted-out benefits (GMP and Reference Scheme Test benefits).
Beneficiaries
Lump sum payments can be made to a wide range of beneficiaries, who don’t necessarily have to be dependants of the member (although scheme rules may restrict this to a narrower range of people). Flexi-access drawdown and annuities can be set up for dependants, nominees or successors of the member. See ‘Dependants, nominees and successors’ for more information.
The payments available when a member dies
The table below shows what can be paid when a member dies with uncrystallised funds remaining:
| Benefit type | Payment type |
|---|---|
| Member dies before age 75 with uncrystallised rights | The beneficiary can:
|
| Member dies aged 75 or over with uncrystallised rights | The beneficiary can:
|
| Member dies, regardless of age, leaving no dependants and has nominated a charity | A charity lump sum death benefit can be paid to a charity nominated by the member. See ‘The charity lump sum death benefit’ for more information. Note - a charity lump sum death benefit isn't a relevant lump sum death benefit, so it doesn't reduce the member's LSDBA. |
1Uncrystallised funds are only tested against the member’s remaining LSDBA, the 'permitted maximum', if they are paid as a lump sum and within a two year period. Any excess over the member's LSDBA will be subject to tax. See ‘The uncrystallised funds two year rule’ and 'Death benefits and the lump sum and death benefit allowance' for more information.
2Where the member died on or after 3 December 2014 and no payment of the annuity was made before 6 April 2015. The two year rule also applies here – see ‘The uncrystallised funds two year rule’ for more information.
3In most cases, the provider won’t have the recipient’s tax code to operate against the payment and will need to deduct income tax using an emergency tax code. This will usually result in too much tax being deducted, but the recipient should be able to reclaim any overpaid tax. More information on this can be found on the Government website. If the beneficiary is a non-qualifying person, the lump sum is taxed at 45%.
This flat rate income tax charge is known as the ‘Special Lump Sum Death Benefit Charge’ and it is levied on the scheme administrator. See ‘Non-qualifying persons’ for more information.
The table below shows what can be paid when a member dies with drawdown funds remaining:
| Benefit type |
Payment type |
|---|---|
| Member or beneficiary dies before age 75, with capped or flexi-access drawdown funds remaining | The beneficiary can:
|
| Member or beneficiary dies aged 75 or over with capped or flexi-access drawdown funds remaining | The beneficiary can:
|
| Member or beneficiary dies, regardless of age, leaving no dependants of the member, and the member or beneficiary has nominated a charity | A charity lump sum death benefit can be paid to a charity nominated by the member or beneficiary. See ‘The charity lump sum death benefit’ for more information. Note - a charity lump sum death benefit isn't a relevant lump sum death benefit, so it doesn't reduce the member's LSDBA. |
1A lump sum death benefit will only be paid tax-free if it’s paid within a two year period. The lump sum is tested against the deceased member's lump sum and death benefit allowance (LSDBA), the 'permitted maximum'. Any excess over the member's LSDBA will be subject to tax - see 'Death benefits and the lump sum and death benefit allowance' and ‘The drawdown funds two year rule’ for more information.
2Where the member died on or after 3 December 2014 and no payment of the annuity was made before 6 April 2015.
3In most cases, the provider won’t have the recipient’s tax code to operate against the payment and will need to deduct income tax using an emergency tax code. This will usually result in too much tax being deducted, but the recipient should be able to reclaim any overpaid tax. More information on this can be found on the Government website. If the beneficiary is a non-qualifying person, the lump sum is taxed at 45%. This flat rate income tax charge is known as the ‘Special Lump Sum Death Benefit Charge’ and it is levied on the scheme administrator. See ‘Non-qualifying persons’ for more information.
Changes to death benefits payable from annuities came into force on 6 April 2015. The table below shows the options:
| Benefit type | Payment made on or after 6 April 2016 |
|---|---|
| Continuing annuity, individual dies before age 75 | Any beneficiary can receive payments tax free, if the member died on or after 3 December 2014 |
| Continuing annuity, individual dies on or after 75 | Any beneficiary can receive the payments at their marginal rate of tax |
| Guaranteed term annuity, individual dies before age 75 | Any beneficiary can receive payments tax free, if the member died on or after 3 December 2014 and no payment is made before 6 April 20151 |
| Guaranteed term annuity, individual dies on or after 75 | Any beneficiary can receive payments at their marginal rate of tax1 |
| Annuity protection lump sum death benefit, individual dies before 75 | Any beneficiary can receive payments tax free |
| Annuity protection lump sum death benefit, individual dies on or after age 75 | Marginal rate tax paid if paid to an individual, or 45% if paid to a non-qualifying person2 |
Note – A beneficiary can be a dependant, a nominee or a successor. See ‘Dependants, nominees and successors’ for more information.
1 If the remaining instalments under a guarantee term are £30,000 or less, they can be paid as a trivial commutation lump sum death benefit. It’s worth noting that where an individual dies before age 75 while still in a guarantee period, income payments made to a beneficiary will be tax free if the relevant conditions above are met, but if those benefits are commuted, the lump sum will be taxed at the recipient’s marginal rate. See ‘The trivial commutation lump sum death benefit’ for more information.
2 See ‘Non-qualifying persons’ for more information.
Since 6 April 2015, a trivial commutation lump sum death benefit can be paid to a dependant instead of a small dependant’s pension if the value of that pension is not more than £30,000, or to an individual where the remaining instalments under a pension guaranteed period are valued at not more than £30,000. This £30,000 limit applies to each registered pension scheme in its own right – it’s not an overall limit.
In order to pay a trivial commutation lump sum death benefit to a dependant or individual, it must be paid to the dependant who is entitled to the annuity or the individual who is entitled to the remaining instalments under the guaranteed period, and the payment must extinguish the dependant’s/individual’s entitlement to pension or lump sum death benefits under the scheme.
Trivial commutation lump sum death benefits can be paid whatever the age of the member at death. The full lump sum payment will be taxed as pension income at the dependant’s/individual’s marginal rate of tax. Where the lump sum payment is in respect of a pension already in payment to the dependant or individual, the PAYE code should already be known. If the provider doesn’t have a tax code to operate against the payment, tax will be deducted at basic rate, which may result in too much tax being paid. The dependant/individual can claim a refund of any overpaid tax. More information on this can be found on the Government website. There is no time limit for making the payment. The dependant’s pension or remainder payable under a guarantee can be commuted at any time.
Payment of a trivial commutation lump sum death benefit is not a relevant lump sum death benefit and it doesn’t use up any of the recipient’s LSDBA.