Death Benefits

Benefits that may be paid out when you die from an occupational pension scheme depend on whether you are an active member, a deferred member or a pensioner member when you die. Death 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

Final Salary or Career Average Schemes

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 final salary and career average schemes provide for a Death in Service lump sum benefit, similar to a life assurance policy. A lump sum is normally paid to a beneficiary or beneficiaries on the death of a member. The value of the lump sum is normally calculated as a multiple of the member's final earnings. A typical payment might be two of four times the salary at the time of death. 

If you die before age 75 and the lump sum death benefit is paid within two years of the reported death, the lump sum can generally be paid without any tax charge.

If you die before age 75 and the lump sum death benefit is not paid within two years of the reported death and the lump sum is not transferred to a separate trust by the scheme administrator before the two year period is up, the lump sum will be deemed to be an unauthorised payment. An unauthorised payment is subject to a tax charge of 55%. 

If the lump sum death benefit exceeds that person's Lifetime Allowance the amount that is more than the Lifetime Allowance is taxed at 55%. 

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

If you die after age 75 and you haven't taken your pension benefits, any lump sum death benefit will be taxed at the 55% 'special lump sum death benefit' rate. 

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). This is because death benefit lump sums must be payable at the discretion of the trustees in order to be exempt from Inheritance Tax. 

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 to any other lump sum payment. The scheme may also provide a dependants pension paid to a spouse, registered civil partner, a financial dependent or children. 

If the scheme is contracted-out, any Guaranteed Minimum Pension (GMP) is payable to a surviving spouse or civil partner. 

Money Purchase Schemes

In money purchase schemes, normally only a refund of the accumulated fund is paid as a lump sum death benefit, although any dependant may have the option to use the accumulated fund to provide pension income instead.

If you die before age 75 and the lump sum death benefit is paid within two years of the reported death, the lump sum can generally be paid without any tax charge. 

If you die before age 75 and the lump sum death benefit is not paid within two years of the reported death and the lump sum is not transferred to a separate trust by the scheme administrator before the two year period is up, the lump sum will be deemed to be an unauthorised payment. An unauthorised payment is subject to a tax charge of 55%. 

If the lump sum death benefit exceeds that person's Lifetime Allowance the amount that is more than the Lifetime Allowance is taxed at 55%. 

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

If you die after age 75 and you haven't taken your pension benefits, any lump sum death benefit will be taxed at the 55% 'special lump sum death benefit' rate. 

Death of a Deferred Member

Final Salary and Career Average Schemes

If you die after ceasing to be an active member of a final salary or career average scheme, normally the only benefit is a refund of the member's own contributions, although some schemes do provide a Death in Deferment Lump Sum, similar to a life assurance policy, calculated as a multiple of earnings at the date of leaving.

If you die before age 75 and the lump sum death benefit is paid within two years of the reported death, the lump sum can generally be paid without any tax charge.

If you die before age 75 and the lump sum death benefit is not paid within two years of the reported death and the lump sum is not transferred to a separate trust by the scheme administrator before the two year period is up, the lump sum will be deemed to be an unauthorised payment. An unauthorised payment is subject to a tax charge of 55%.

If the lump sum death benefit exceeds that person's Lifetime Allowance the amount that is more than the Lifetime Allowance is taxed at 55%.

If the scheme is contracted-out, any Guaranteed Minimum Pension (GMP) is payable to a surviving spouse or civil partner. Some schemes though, do provide dependents pensions as well.

If you die after age 75 and you haven't taken your pension benefits, any lump sum death benefit will be taxed at the 55% 'special lump sum death benefit' rate. 

Money Purchase Schemes

In money purchase schemes, normally only a return of the accumulated fund is paid as a lump sum death benefit, although any dependent may have the option to use the accumulated fund to provide pension income instead.

If you die before age 75 and the lump sum death benefit is paid within two years of the reported death, the lump sum can generally be paid without any tax charge.

If you die before age 75 and the lump sum death benefit is not paid within two years of the reported death and the lump sum is not transferred to a separate trust by the scheme administrator before the two year period is up, the lump sum will be deemed to be an unauthorised payment. An unauthorised payment is subject to a tax charge of 55%. 

If the lump sum death benefit exceeds that person's Lifetime Allowance the amount that is more than the Lifetime Allowance is taxed at 55%. 

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

If you die after age 75 and you haven't taken your pension benefits, any lump sum death benefit will be taxed at the 55% 'special lump sum death benefit' rate. 

Death of a Pensioner

Final Salary and Career Average Schemes

A final salary or career average scheme will normally continue to pay the pension to a dependant (sometimes known as a 'survivor').  The level of pension payable is set by the scheme rules.  Alternatively, it may also provide a lump sum on death, known as a 'pension protection lump sum death benefit.' This is basically a lump sum representing the difference between the cost of buying your pension at outset less the gross pension payments received prior to death. 

Any such payment is subject to a 55% 'special lump sum death benefit tax charge. 

If the scheme is contracted-out, any Guaranteed Minimum Pension (GMP) is payable to a surviving spouse or civil partner. 

Money Purchase Schemes

In a money purchase scheme what can be paid on death depends on what has happened to the pension fund at retirement. 

If the retirement fund has been used to buy an annuity, that annuity can be set up so as to provide a dependant's pension. If the retirement fund included a Protected Rights pot this must include a 50% spouses/civil partner's pension. Such pensions are taxed as income. 

It may be possible to set up your annuity which provides a lump sum on death.  If you die an 'annuity protection lump sum death benefit' is paid. An 'annuity protection lump sum death benefit' is basically a lump sum representing the difference between the fund value used to buy the annuity less the gross annuity payments received prior to death. 

An 'annuity protection lump sum death benefit' is subject to a 'special lump sum death benefit' tax charge of 55%. 

If an annuity is not bought but an income is drawn from the pension fund (this is known as pension drawdown), the balance of any unused fund can be used to buy dependant's pensions, continue as pension drawdown or paid as a lump sum or possibly, a combination of the three options. Any lump sum paid is taxed as a 'special lump sum death benefit' at 55%. 

If you have a pension drawdown arrangement which includes Protected Rights  and you are either married or in a registered civil partnership at the time of your death, sufficient Protected Rights Funds has to be used to provide a 50% pension to your spouse or civil partner before any lump sum death benefit can be paid. 

With the abolition of Protected Rights on 6 April 2012, it is expected that for any deaths on or after this date, the entire Protected Rights Fund could be used to pay a lump sum. 

If your dependant continues with drawing income from the pension fund, the balance of any unused fund on death can be paid as a lump sum to a charity. If you or your dependent has not nominated a charity, the pension provider will nominate a charity. 

Any lump sum paid to a charity is tax-free.

Q & A's