Death Benefits

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 and before or after age 75.

Death Before Retirement Before Age 75

Death benefits under a personal pension plan or stakeholder scheme are normally paid as a lump sum. Lump sum death payments usually consist of the return of the pension fund that has accumulated together with any life assurance.

If 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 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 (normally the pension provider) 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 above the Lifetime Allowance 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 dependants' pensions.

If you have Protected Rights and you are married or in a registered civil partnership when you die, the Protected Rights Fund has to provide pension income.  If your husband, wife or civil partner is entitled to a small dependant's pension, it may be possible to take this as a lump sum instead.

If you have Protected Rights and are not married or in a registered civil partnership when you die, the value of the Protected Rights Fund may be paid as a lump sum to either those people you have previously nominated in an expression of wish form, or failing which, your estate.

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.

Death After Retirement Before Age 75

What can be paid on death depends on what has happened to the pension fund at retirement.

Annuity Already in Payment

If you already have an annuity in payment when you die, you may have chosen for it to continue to be paid to your husband, wife or dependant.  These annuities are taxed as income.

It may be possible to set up your annuity which provides a lump sum on death. These types of annuities have different names but are sometimes called 'capital protection annuities' or 'value protection annuities'. When 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 pension 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%. 

Pension Drawdown

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 dependants' pensions, paid as a lump sum or a combination of both options. Any lump sum paid is taxed 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 you die without leaving any dependants, the balance of any unused fund on death can be paid as a lump sum to a charity nominated by you. If your dependant continues with pension drawdown and dies leaving no further dependants of yours, a lump sum may be paid to a charity chosen by your dependant. 

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

Death After Retirement After Age 75

Annuity Already in Payment

If you already have an annuity in payment when you die, you may have chosen for it to continue to be paid to your husband, wife or dependant.  These annuities are taxed as income.

It may be possible to set up your annuity which provides a lump sum on death. These types of annuities have different names but are sometimes called 'capital protection annuities' or 'value protection annuities'. When 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 pension 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%.

Pension Drawdown

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 dependants' pensions, paid as a lump sum or a combination of both options. Any lump sums paid are taxed 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 you die without leaving any dependants, the balance of any unused fund on death can be paid as a lump sum to a charity nominated by you. If your dependant continues with pension drawdown and dies leaving no further dependants of yours, a lump sum may be paid to a charity chosen by your dependant.

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

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