Before the pension freedoms were introduced in April, death benefits could be paid in the form of a lump sum or as a dependant’s “pension”, either as an annuity, a scheme pension or as dependents’ drawdown. I looked at this in some detail last week.
But that was then. The pension freedoms legislation changed the position and now, on the death of a member, death benefits can be paid in the form of a lump sum payment, scheme pension, flexi-access drawdown or an annuity. The big change is that the recipients of these last two (income-based) death benefits are not limited to dependants.
The scheme administrator will, broadly speaking, retain discretion over who should receive such benefits and, in most cases, the form the benefits should take. This is necessary to retain the inheritance tax efficiency of the death benefits.
It should not be possible for the member to retain the freedom to dispose of death benefits if those benefits are to remain outside their estate for IHT purposes. However, beneficiaries’ flexi-access drawdown can only be paid to those “nominated by the member”. While such a “member nomination” can also be made by the scheme administrator, it is in this situation that restrictions apply.
To understand the position it is necessary to consider Part 1 of Schedule 2 Taxation of Pensions Act 2014. This has amended paragraph 27A of Schedule 28 of Finance Act 2004, so that is now reads:
“In relation to any particular benefits under an arrangement, no individual nominated by the scheme administrator counts as a nominee of the member at any time when there is (a) a dependant of the member, or (b) an individual, or charity, nominated by the member in relation to the benefits.”
So the scheme administrator cannot designate death benefits to beneficiaries’ flexi-access drawdown for the benefit of any nominee where a dependant of the member exists and/or one or more nominees have been named by the member.
What this means is that:
- If the member dies without having made a nomination but leaving a dependant, the scheme administrator can nominate that dependant (but nobody else) to receive beneficiaries’ flexi-access drawdown benefits
- If the member dies without having made a nomination of a nominee(s) and there are no dependants, the scheme administrator can nominate a nominee(s) to receive beneficiaries’ flexi-access drawdown benefits
- Regardless of any member nomination or the existence of a dependant, lump sum death benefits can be paid by the scheme administrator to anyone under the discretionary disposal provisions.
So, where a scheme administrator cannot make a member nomination for the receipt of beneficiaries’ flexi-access drawdown themselves (that is, because a dependant exists or the scheme member has already nominated a nominee), they can still effectively ignore the member nomination and decide to pay lump-sum benefits to any one or more of the discretionary class of beneficiaries specified in the scheme rules.
This may be done, for example, where the family of the deceased member agrees benefits should not be paid to the member-specified nominee or a dependant but to someone else who has not been specified as a nominee by the deceased member.
The tax position on any death benefits will depend on the age at which the member died (75 or over, or under 75) and whether the death benefits are paid out or designated broadly within two years of the date of death. Beneficiaries’ flexi-access drawdown can be paid to nominees even if there are surviving dependants of the deceased but only if the nomination was made by the member.
A dependant, nominee or successor is unable to make a charity nomination in cases where a valid charity has been nominated by the member. If that member-nominated charity no longer exists, then a new charity nomination can then be made by a beneficiary if they so desire.
There is also a similar process for nominations on the death of dependants, nominees or successors. However, there is then less likely to be a surviving dependant of the member.
Next week I will look at how this works in practice and what advisers are doing to cope with what appears, at least at first sight, to be the over prescriptive and difficult-to-justify nomination and beneficiaries’ flexi-access drawdown rules.
Tony Wickenden is joint managing director of Technical Connection