The benefits payable on the death of a
member of a personal pension plan or stakeholder pension differ
according to whether death occurs before or after retirement.
Death before retirement before age 75.
Death benefits under a personal pension plan or stakeholder
scheme are normally paid as a lump sum. Death payments usually
consist of the return of the pension fund that has been accumulated
together with any life assurance.
The total amount is allowed to be paid out as a lump sum. If the
amount paid exceeds the Lifetime Allowance (£1.8
million in tax year 2010/11) the excess is taxed at 55%.
Death benefits do not have to be taken as lump sums. All or part
of the lump sum can be used to provide dependents pensions. If a
pension is paid as part of the death benefit, the value used for
calculating the lifetime allowance is £20 for every £1
of the annual pension.
Death after retirement before 75
What can be paid on death and how it is taxed, depends on what
has happened to the pension fund at retirement.
Secured Income
This means that the retirement fund, or part of it, has been
used to buy an annuity. That annuity can be set up so as to provide
a dependent's pension. Such pensions are taxed as income.
Either as an alternative or in addition, the individual could
have set up their annuity so that a lump sum is paid if death
occurs within a fixed period, say 5 years. This lump sum is taxed
at 35%.
An annuity can also now be set up such that a lump sum is paid
equal to the difference between the capital sum used to buy the
annuity and the total amount of pension paid out before death. This
type of annuity is known as a Capital Protected Annuity and the
lump sum is taxed at 35%.
Unsecured Income
If an annuity is not bought but an income is drawn from the
pension fund (this is known as Income Drawdown), the balance of any
unused fund can be used to buy dependents pensions, paid as a lump
sum or a combination of both options. Any lump sums paid are
taxed at 35%.
Death after retirement after 75
At 75, any remaining fund must be used to buy an annuity or put
into a new type of pension called an Alternatively Secured
Pension (ASP).
On death, only dependents pensions can be paid. If there are no
dependents, any residual funds can be refunded to the scheme, the
employer or paid to a charity.
Q & A's
On the death of a scheme member, a dependent's pension can be
paid to any of the following:
- the member's spouse at the date of death.
- The member's partner as registered under the Civil Partnership
Act 2004.
- A child of the member, provided the child is under age 23. A
child over 23 can qualify as a dependent if, in the opinion of the
scheme administrator, they are dependent due to physical or
mental impairment.
- An individual who, in the opinion of the scheme administrator,
was
- financially dependent on the member; or
- financially interdependent; or
- dependent on the member due to physical or mental impairment at
the date the member died.
Normally this type of pension scheme will not pay out the full
value on death. They were usually set up to pay out:
- nothing in the event of death; or
- a refund of contributions paid but with no interest; or
- a refund of contributions with interest added. Often the
interest rate used is written into the policy and is quite low, say
3% p.a.
If you have this type of pension, it is important to know what
is payable on death. If that is valuable to you, you may need to
transfer into a personal or stakeholder scheme.
You need to decide what would happen to your spouse or partner
if you were to die and how they would manage financially.
You should also take account of the amount of pension fund you
have already built up and make sure it would be paid out fully if
you die. The bigger your fund, the less life assurance you need to
buy. The less you have saved toward your retirement, the more you
need to insure. A younger person might consider insuring from
between 4 to 6 times their earnings, although this is only a rough
guide.
