Death Benefits

The benefits you can expect an occupational pension scheme to pay out when you die depend on whether you are an active member, a deferred member or a pensioner member when you die. The benefits payable on the death of a member differ from scheme to scheme and for each member status. The following is a general guide to the benefits payable.

Death of an active member

The benefits payable are usually divided into three separate elements - a Death in Service lump sum, a return of the member's own contributions and a survivor's pension. These three elements do not automatically all feature in every pension scheme.

Most schemes provide for a Death in Service benefit, similar to a life assurance policy. A lump sum is paid to a beneficiary on the death of a member. The value of the lump sum is normally calculated as a multiple of the member's final earnings. The benefit can be paid free of tax if it is less than the member's available lifetime allowance.

The benefit is normally only available to active members but some schemes do extend the benefit to other members, in some circumstances.

The member, usually when they first join the scheme, will complete a form indicating whom they would like the trustees to pay the lump sum to. However, the trustees have full discretion over the payment of the lump sum so can choose to pay it to whoever they feel is most deserving (i.e. someone financially dependent on the member).

Other benefits may be provided depending on the scheme type.

In final salary and career average schemes it is common for a refund of the member's own contributions to be paid. In addition, the rules sometimes provide for a spouse's pension of up to two-thirds of the member's potential pension at Normal Retirement Date (NRD). All schemes that provide a pension for widows must also provide pensions for widowers. Registered civil partners must be treated the same as married couples.

Some schemes will provide additional pensions for dependent children.

In money purchase schemes, normally only a refund of the accumulated fund is paid. The most a money purchase scheme can pay is the value of uncrystallised funds in the plan when the member or policyholder dies (but can include growth on those funds up to the point the sum is actually paid out). Uncrystallised funds means funds that have not as yet been used to provide that member with a benefit under the scheme.

If the scheme is contracted-out, a pension from the accumulated Protected Rights pot may be payable to a surviving spouse or civil partner.

Death of a deferred member

In final salary and career average schemes, normally the only benefit is a refund of the member's own contributions. If the scheme is contracted-out, the Guaranteed Minimum Pension (GMP) is payable to a surviving spouse or civil partner. Some schemes though, do provide full widows' benefits of up to two-thirds of the member's preserved pension.

Any lump sum payment can be paid free of tax if it is less than the member's available lifetime allowance.

In money purchase schemes, normally only a refund of the accumulated fund is paid. The most a money purchase scheme can pay is the value of uncrystallised funds in the plan when the member or policyholder dies (but can include growth on those funds up to the point the sum is actually paid out). Uncrystallised funds means funds that have not as yet been used to provide that member with a benefit under the scheme.

If the scheme is contracted-out, a pension from the accumulated Protected Rights pot may be payable to a surviving spouse or civil partner.

Death of a pensioner member

Most pensions are set up with a five-year (sometimes a ten-year) guarantee. If the member dies within the guarantee period, the remaining unpaid pension instalments are paid to a beneficiary. For example:

• Date of retirement: 1 April 1998
• Guarantee period: 5 years (60 months)
• Guarantee expiry date: 31 March 2003
• Date of death: 24 April 2002
• Monthly pension: £500.00
• Pension instalments paid: 49 (1 April 1998 to 1 April 2002 inclusive)
• Unpaid instalments: 11
• Amount to be repaid: £5,500 (11 x £500)*
  * This sum may be reduced to reflect the fact that the remaining payments are being paid early.

In a final salary or career average scheme, the level of pension payable to a survivor is set by the rules of the scheme. It is usually half of the member's pension but can be as high as two-thirds.

In a money purchase scheme, on retirement, the member purchases an annuity with the fund built up in the scheme. The member can choose the level of spouse's pension payable on their death from the options available from the provider. The pension payable on the member's death is therefore equal to the level chosen.

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