City Trustees - part of Mattioli Woods



News and Media

13 March 2015

Pensions Perspective: Can a scheme delay the payment of death benefits?

I have a client who unfortunately passed away at the end of January. His pension was fully crystallised at the date of his death. Can the scheme delay making any death benefit payments until April 2015; are there any time limits for the scheme to pay out death benefits; and does the date of death affect the tax position?

You do not say whether your client was under or over the age of 75 when he died, or whether capital or income is required or whether lifetime allowance issues apply. However, the position for all scenarios is that the tax treatment will be that in force at the date the payments are made, not the date of death, which means you can delay payment of death benefits until after 6 April 2015.

For a member below the age of 75 who has died, and a lump sum is required this will be a drawdown pension fund lump sum death benefit and, from 6 April 2015, this should be paid out tax-free.

However, if entitlement to the death benefits above is paid out more than two years after the earlier of the day on which the scheme administrator knew of the death and the day on which the scheme administrator could reasonably have been expected to know of the death, the lump sum death benefits will be subject to the same tax treatment as if the member had died having reached the age of 75.

For a member who died after the age of 75, there will be a special lump sum death benefit charge of 45% for the 2015/2016 tax year. For 2016 onwards, it is anticipated that the tax charge will reduce to the marginal rate of income tax in the hands of the beneficiary.

For your client, if he was over the age of 75 at the date of his death there could be less tax to pay if the death benefit payment is delayed until after 6 April 2016; however the beneficiaries may require payment earlier!

Income options will still be available but post April 2015 there will also be an extended list of beneficiaries that can receive an income. On death before age 75, income can be paid tax free (if designated within two years). On death of the member after age 75 (or if the designation is made after 2 years) the income paid to a beneficiary will be taxed as earned income. For income being paid from a previously designated fund there is not two year rule and any income is tax free.

Whilst the changes from April will however allow for individuals other than 'dependants' to benefit from a pension income, as the member died prior to April 2015, the scheme administrator/provider will be guided by any nomination form and any surviving dependants of the late member.

One small point to note is that, currently, for a client who has died with uncrystallised funds over the lifetime allowance, these could be paid to a spouse as taxable income without triggering a lifetime allowance test. However, from April 2015 any uncrystallised funds will be tested against the lifetime allowance as a new BCE at the point they are taken. However, if the funds are not designated within a two-year period, they could be taken as taxable income without a lifetime allowance test being triggered.

 

Pension Perspective is a weekly feature from City Trustees, covering questions that our experienced sales and technical teams have received from advisers. The Q&A covers a range of subjects including property, pension contributions, protection, auto-enrolment and more.

City Trustees operates a free technical helpline for advisers for support with pension challenges. Tel: 0116 240 8731 or email: technicalhelp@citytrustees.co.uk.

 

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