City Trustees - part of Mattioli Woods

News and Media

20 August 2013

A guide to pension death benefits

Conversations around death benefits can be a taboo subject, but considering your loved ones after you have passed should not be restricted to assets in your will.

After their home, a pension scheme can often be a client's second biggest asset, which sometimes are more liquid that other non-pension scheme assets, enabling access to funds at a potentially difficult time.

When the inevitable does happen, the payment of pension death benefits can vary depending on whether you die before or after you take retirement benefits.

In the event of death before the age of 75 and before taking pension benefits, a tax-free lump sum, up to the current (or members personal) lifetime allowance can be paid. This takes into consideration all pension assets (though there are specific rules regarding benefits from defined benefit schemes) and also includes separately insured group life schemes. Funds in excess of the lifetime allowance, paid as a lump sum, will be taxed at 55%. Alternatively, the whole of your fund or any funds in excess of the lifetime allowance, may be used as a dependant's pension and will be taxed as earned income.

In the event of death, whilst taking benefits from your scheme, your death benefits will depend upon the type of pension benefit in payment. Self-invested funds in payment, will be able to provide either a taxable dependants pension, or a lump sum taxed at 55%. Alternatively, in the case of no dependants, a payment to charity can be made tax free.

Lump sum death benefits are paid at the discretion of the scheme trustee, and it is important that expression of wish forms are kept up to date. For clients holding property in their self-invested arrangements, consideration may need to be given to creating a structure to enabling any remaining business/pension partner to retain the property, or how the property will be dealt with in the event of death.


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