Bereavement: what to do
Lump sum on death
If someone close to you dies, you may receive a cash lump sum benefit from their pension scheme
A pension scheme may pay lump sum death benefits to financial dependants if a member dies. The amount paid depends on the scheme’s rules and whether the member was an active member of the scheme. Lump sum death benefits are usually paid tax-free, they are paid at the discretion of the scheme’s trustees or pension provider.The trustees or pension provider will take into consideration the member’s wishes as set out in the expression of wishes or nomination of benefits letter, if this was completed but will not necessarily follow them; for example if they have grounds to believe that they are out of date. It's therefore very important that you keep your expression of wishes form up to date.
Different ways lump sum death benefits may be provided
- Life cover: workplace pension schemes may include life cover for members that are contributing to the scheme (active members). The amount payable is often expressed as a multiple of the member’s pensionable earnings or salary (for example, 2 x pensionable earnings or 4 x salary). Defined benefit pension schemes may also pay a refund of the contributions paid by the member, subject to the scheme’s rules, if the member dies before starting to draw retirement benefits. If the member had started to draw retirement benefits, an annuity may pay a pension protection lump sum if the member dies. This is usually worked out as the difference between the cost of securing the member’s pension benefits and the amount (before tax) that has actually been paid out up to the date of the member’s death;
- Defined contribution pension schemes normally pay the value of the pension pot tax free if the member dies before starting to draw retirement benefits, provided they are aged less than 75 at the date of death. If the member has started to draw retirement benefits, and/ or dies after the age of 75, and the value of the remaining pension pot is paid as a lump sum to dependants, this is taxed at the recepient's marginal rate.
- Guaranteed periods on annuities: If an annuitant dies and the annuity includes a guarantee period any outstanding payments due over the guarantee period may be paid as a lump sum. This payment would normally be made to a surviving annuitant or to the annuitant’s estate.
How they are paid
Lump sums are normally paid at the discretion of the scheme’s trustees or pension provider, although you can tell them who you would like to benefit should you die using an expression of wishes letter or nomination of benefits form. These are not binding on the trustees or pension provider and they will take them into account but may not follow them; for example if they have grounds to believe that they are out of date. It is therefore very important that you keep your expression of wishes form up to date. If you purchased an annuity when you started to draw pension benefits, you may have included a guarantee period, which pays the balance of any pension due over the guarantee period if you die, and/ or included a continuing pension after your death payable, usually, to your surviving spouse, partner or civil partner.
Using a trust
If you have a personal pension, self-invested personal pension (SIPP) or stakeholder pension scheme, you may be able to ask your pension provider to pay any death benefits to a trust that you have set up, or that is set up by your will. This may be done for estate planning or inheritance tax planning purposes. You can also ask the trustees of a workplace pension scheme to pay benefits to a trust, but, as mentioned earlier, your request is not binding. Once the death benefits have been paid to the trust, your trustees can distribute them to your chosen beneficiaries, subject to the terms of the trust.
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.