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Pension death benefits
Pension reforms introduced significant changes to the taxation of pension death benefits, which, of course, are still not straightforward.
The table below explains how pension benefits are taxed on death and highlights the difference between uncrystallised funds (pensions that are not in payment) and crystallised funds (pensions that are in payment). It also details the differences, on death, under and above age 75.
Taxation of pension benefits on death
| Death below age 75 | Death above age 75 | |
|---|---|---|
Uncrystallised Funds - Pensions not in payment
| The fund can be paid to any beneficiary completely tax free as a lump sum, annuity or as a drawdown pension.
The benefits will be tested against the
| The fund can be paid to any beneficiary, taxed at their marginal rate, as a lump sum, annuity or as a drawdown pension.
The fund can be paid to a Trust as a lump sum less a 45% Tax charge.
|
Crystallised funds - Pensions in payment
| Can pass completely tax free to any beneficiary as a lump sum or drawdown pension.
| The fund can be paid to any beneficiary, taxed at their marginal rate, as a lump sum, annuity or as a drawdown pension.
The fund can be paid to a Trust as a lump sum less a 45% tax charge. |
The restriction that income drawdown can only be payable to a dependant no longer applies. This now means any beneficiary can be the recipient of a pension death benefit, and these benefits can pass down through the generations until the fund is used. If the individual dies under the age of 75, the rule that tax free cash lump sum payments must be made within two years of the pension scheme administrator being notified of the member’s death still remains. Any lump sum payments made after the two year period will be taxed at the recipient’s marginal rate.
It is important to complete a Death Benefit Nomination Form (sometimes known as an Expression of Wish form) to inform the Scheme Administrator of the chosen beneficiaries. These forms should be reviewed regularly, as personal circumstances change. If a beneficiary is not nominated, the benefits could become payable to the deceased’s estate.
As the tax year approaches, it is also important to consider using the annual pension allowance, which is up to £40,000 gross. For individuals with an income over £150,000, consideration needs to be given, where appropriate, to any tapering of the annual pension allowance.
There is an upper limit on total pension savings, called the lifetime allowance, which increases from 6 April 2019 to £1.055 million. Any amount above this limit held within pension arrangements will be liable to a Lifetime Allowance Tax charge of either 25% or 55%.
Although reforms provide some important new benefits and flexibility, pensions have not become any simpler.
Should you wish to discuss any of these matters in more detail please contact me on 01206 217614 or paul.chilver@birkettlong.co.uk
