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Pension freedoms have brought about many changes to the taxation and planning opportunities of pension death benefits. The rules are complex, and care must be taken to review your circumstances and options.

Pensions are bit like apples. There are so many different varieties and some are better than others. This blog considers the rules surrounding pension death benefits and the planning opportunities for individuals.

Format of benefits

Pension death benefits can be paid in a variety of ways depending upon the scheme rules and whether benefits are:

  • Uncrystalised (untouched, i.e. before taking any pension cash lump sum or income)
  • Have been invested in flexi-access (or capped) drawdown or
  • Used to buy an annuity

In general terms, a beneficiary can use flexi-access drawdown to gradually withdraw funds, or a beneficiary’s annuity can be purchased.

Taxation of benefits

A key factor in the tax treatment of death benefits is the age at which the member dies, and whether this is before or after age 75.

  • Below 75 – If a member dies before age 75, payments to a beneficiary will be made tax free.
  • 75 & above – If a member dies on or after age 75, payments will be subject to income tax at the beneficiary’s marginal rate.

Where a member has no dependents, a charity lump sum death benefit can be paid if scheme rules allow. A member (or, where they have inherited benefits, the dependent, nominee or successor) must nominate the charity.

The scheme administrator can’t select the charity if no nomination is made before the member, or beneficiary, dies. Payment of a charity lump sum death benefit is tax free so long as it’s used for charitable purposes.

Inheritance tax (IHT)

Generally pension death benefits are not subject to IHT. There are however a few unusual situations where a potential IHT liability can arise. These include:

  • Where there has been a transfer of benefits in the two years before the member’s death, the member knew at the time of transfer they were in serious ill-health and increasing death benefits was a key reason for the transfer.
  • If benefits are to be paid to someone ‘as of right’. Normally scheme administrators have discretionary powers to choose a recipient but if this doesn’t apply, IHT may apply. For example, if a member is able to, and has, given the scheme administrator a binding direction to make payment to a specific individual.

Who can receive death benefits?

Benefits can be made to a wide range of beneficiaries. These people don’t need to be a dependant of the member or related to them. However, it is possible scheme rules can restrict this to a narrower range of people. Flexi-access drawdown and annuities can be set up for dependants, nominees or successors of the member.

Dependents – include a spouse, civil partner and children under age 23. It can also include others such as people who are financially dependent or interdependent on the member.

Nominees – are people who have been nominated by the member. Or, if there are no dependants and no one has been nominated, the scheme administrator can nominate an individual.

Successors – are individuals nominated by a dependant, nominee or other successor. If no one has been nominated the scheme administrator can nominate a successor.

Completing and Updating Expression of Wish

Normally, schemes allow members (and nominees/successors) to complete an Expression of Wish form (sometimes called a Nomination of Beneficiary form). This allows members to suggest who they would like benefits to be paid to in the event of their death. However, normally, the wishes detailed on this form aren’t binding upon the Scheme Administrator who has discretionary powers to choose the recipients.

It is crucial members complete this form to give guidance to the Scheme Administrators and update it as personal circumstances change. It’s also important to review your position if you are still in drawdown after age 75, as the change in taxation of death benefits at that point may mean an alternative beneficiary is more appropriate.

If a member doesn’t complete an expression of wish form, the position can get complicated as illustrated in the table below


Did member nominate someone to continue drawdown?

Is there a


Potential Outcomes

Funds remain in pension drawdown wrapper – to be withdrawn as required

Funds are paid out of pension wrapper as a lump sum



At SA discretion to one or more dependant(s) only

At SA discretion to anyone



At SA discretion to anyone

At SA discretion to anyone



At SA discretion to one or more nominee(s) and/or dependant(s) only

At SA discretion to anyone



At SA discretion to one or more nominees(s) only

At SA discretion to anyone

SA = Scheme Administrator, although a Trustee may hold this function in some schemes

Where the member has not made a nomination and has left a dependant(s), the scheme can only set up drawdown for someone who is a dependant.

Where the member has not made a nomination and has no dependants, the scheme can nominate any individual to receive drawdown – although clearly the member has not provided any guidance as to potential recipients. To avoid this latter situation arising, a member may want to include multiple potential beneficiaries within their Expression of Wish rather than one individual. A Scheme Administrator can choose to pay a lump sum to any beneficiary rather than set up a drawdown for a dependant, nominee or successor.

Passing money down the generations

The ability to pass on unused drawdown funds gives endless planning opportunities. A member can pass on funds to their nominated beneficiary, who in turn can pass on unused funds to a successor and so on. The same tax treatment applies but on death it is the age of that beneficiary which determines the tax status of the funds.

Below 75 – If the beneficiary dies below age 75 their successor can take inherited funds tax-free.

75 & above – If the beneficiary dies at 75 or over, any benefits taken by the successor will be taxed at their marginal rate of income tax.

Two Year Rule

To ensure benefits are paid tax efficiently, payments to beneficiaries need to be made within two years from:

  • When the scheme administrator was first notified of the member’s death (or could reasonably have known the member died).
  • When the nominated beneficiary dies and passes funds onto a successor
  • Where the beneficiaries wants to continue in drawdown. However, they only need to make the designation into drawdown, there is no requirement to take any income.

If benefits are not paid within two years, they will normally be subject to income tax even if the member died before age 75.

Checking the options your pension offers

Many older style personal pension plans (and even some newer ones) do not offer flexi-access drawdown. Some may offer flexi-access drawdown for dependants, but no nominees or  successors. If you want to pass you pension on in a tax efficient way, it is very important to check that your pension plan offers the option for your dependant/nominee/successor to keep the funds invested in pension drawdown. The alternative (as shown in the table above) is that the pension fund is paid out as a lump sum and taxed at the recipient’s marginal rate of income tax if death occurs post 75 (assuming it isn’t paid to a charity).

Let’s think about that outcome for one moment and consider some examples of where unnecessary tax is suffered:

  1. John Smith has survived his wife. He has a home valued at £700k and savings of £300k. He also has an uncrystallised (untouched pension) valued at £100k. John dies age 85 and had nominated his two children, Harry and James to receive his pension. The good news for John is that his pension is outside of his estate for inheritance tax purposes. Unfortunately, John’s pension does not offer flexi-access drawdown and therefore the pension has to be paid out as a cash lump sum. Harry and James both work earning £50k p.a. and are therefore higher rate tax payers (40%). They receive £50k each from John’s pension which taxed at 40%. Combined, they must give the taxman £40,000.

  1. Lisa Gold, has a died age 88. She had a £200k pension in flexi-access drawdown. Lisa wanted her pension to benefit her four grandchildren (aged 8, 10, 11 and 12) to help pay for their further education. Lisa completed an expression of wish form stating each grandchild should receive 25% of her pension pot. Unfortunately, Lisa’s pension provider does not allow flexi-access drawdown for minors. Therefore, a cash lump sum of £50k is paid out to each grandchild. The tax charge on each grandchild is £8,700 meaning the total tax payable is £34,800.

  1. David Alsop, has died age 77. He completed an expression of wish form asking for his £100k flexi-access drawdown pension to pass to his wife, Mary, on his death. Mary inherits the pension and dependant’s flexi-access drawdown commences. On her death, 5 years later, Mary leaves a pension pot of £50k to her son, Brandon. Unfortunately, Mary did not update her expression of wish for the pension and did not know the pension plan would have to paid out as a cash lump sum on her death as it does not offer Successor Drawdown. Brandon is a basic rate tax payer earning £40,000 p.a. He adds the £50k pension cash lump sum to his other income and has to pay income tax of £19,000.

All three examples above suffer unnecessary tax charges for the beneficiaries. All could have been avoided if the pensions were transferred into plans that offered the appropriate nominee/successor drawdown options.

Leaving tax to one side, everyone at the very least, should complete a pension expression of wish form. Give the pension scheme administrators or Trustees a good indication of who you want to inherit your pension, whatever age death occurs.

For example, if you have a partner, and children from a previous marriage/relationship, who would the scheme trustees pay the pension fund to? You may have a specific idea, but unless it is conveyed to the pension scheme in writing, you are leaving an important legacy to chance.



Please contact us if you would like to understand what death benefit options your pension plan has, and whether it is best placed to meet your financial planning needs.



Thank you to Retirement Advantage for contributing content to this blog.