Clients frequently ask us this question and this article is designed to give you a basic overview of the legislation governing pension fund death benefits. However, nothing is an adequate substitute for specific information tailored to your personal circumstances, so if you would like further information please get in touch with us for more specific guidance.
Pension fund death benefits
The answer to this question will depend on not only legislation, but also the rules of your pension fund. Therefore, your first step should be to consult your pension fund administrator/trustees to double check that your scheme is fully compliant with current legislation. Luckily, if your pension fund is with Hanover on our latest SSAS Trust Deed & Rules then you will benefit from the full flexibility of the current legislation, brought in by the Taxation of Pensions Act 2014 (TOPA 2014). The details below are mainly aimed at plans offering full flexibility, so different rules could apply if you have alternative plans, such as contract based defined contribution or defined benefit schemes.
When a member passes away, the legislation allows trustees to use any remaining funds attributed to the member to pay death benefits from the scheme. These benefits can be split into two categories:-
- The trustees can pay a lump sum from the scheme.
- The trustees can pay a dependant/nominee/successor pension.
Benefits are paid at the discretion of the trustees, and therefore are usually paid outside of the member’s estate and free of Inheritance Tax (IHT). If the member passes away prior to age 75 then the above benefits can usually be paid tax-free. If the member passes away after the age of 75 then benefits are typically taxed as income in the hands of the recipient. Benefits may be tested against the members remaining Lifetime Allowance, depending on when they are paid and whether the member has drawn retirement benefits prior to passing away.
A tax efficient way of passing funds to the next generation
Although benefits are paid at the discretion of the trustees the member has the ability to state their wishes by completing an Expression of wish death benefit nomination form. With the ability to pay a lump sum and/or pension benefits directly from the scheme and the IHT benefits, members often use their pension benefits as a tax efficient way of passing funds down to the next generation. This can either happen on the death of the member or on the death of their spouse, if they elected a dependant’s pension when the member passed away.
Once death benefits are in payment, the trustees will liaise with beneficiaries to ensure that updated Expression of Wish death benefit nomination forms are completed. As long as sensible investment and pension drawing strategies are implemented the payment of death benefits can continue down several generations under the current legislation, so a member could potentially use their fund to provide benefits first to their spouse, then their children, then grandchildren etc.
A number of options available
There are a number of options open to members when considering death benefits; for example whether to pay benefits to beneficiaries directly from the pension fund, or whether to pay benefits to a family trust that then distributes payments to selected beneficiaries. This is where Hanover clients will benefit from being part of the wider Ince Gordon Dadds group. Our colleagues have a wealth of knowledge in family planning and providing IHT advice to individuals, encompassing not just the pension fund but also their wider income and estate planning. We would be happy to put you in contact with one of our partners who could provide you with specific expert advice based on your personal circumstances.
We hope that the above details are of use in giving some general guidance regarding the legislation surrounding the payment of death benefits. For further information specific to your particular circumstances please contact your usual Hanover consultant.
Articles published on this website were correct when they were written but may be out of date by the time you read them. While we make every effort to ensure that the information contained on this website is correct you should not rely on it without taking advice from a member of the firm.