We are often asked about death benefits and thought it would helpful to share our top five most frequently asked questions.
1. Who pays the lifetime allowance charge when an individual dies?
If the individual dies with uncrystallised benefits, these are tested against their remaining lifetime allowance. The personal representatives are then responsible for working out any chargeable amount and reporting this to HM Revenue & Customs.
The recipient of the death benefit would then be assessed and be liable for any charge due. This is different from the process applied during the lifetime of the individual where the scheme administrator would deduct any charge and pass this to HMRC.
2. On death before age 75, what tax is due if more than two years passes between the provider being aware of the death and the benefits being paid out?
Ordinarily, death benefits would be income tax free on death before age 75. If more than two years passes before they are paid out, then they become liable to income tax at the marginal rate of the beneficiary. If the death benefit is subject to the lifetime allowance but two years passes before the benefit is paid out, income tax will apply instead of the lifetime allowance tax charge.
3. Why is it important to nominate beneficiaries for drawdown?
The scheme administrator can only nominate a beneficiary to receive flexi-access drawdown where there is no surviving dependant or nominated beneficiary. If there is a surviving dependant or nominated beneficiary, the scheme administrator would not be able to pay flexi-access drawdown to anyone else; only lump sums could be paid.
4. On death after age 75, if there are uncrystallised benefits, what happens to the pension commencement lump sum?
On death after age 75, any death benefits are subject to income tax at the marginal rate of the beneficiary. The option to take a PCLS dies with the individual.
5. If an individual directs who is to receive any benefits on their death rather than using discretion, are there any inheritance tax consequences of doing this?
As the individual will be taking the discretion away from the scheme administrator, any benefits paid will normally be subject to IHT. If the benefits are left to a spouse or civil partner, these will be exempt from IHT.
Fiona Hanrahan is senior product insight and technical support analyst at Royal London