Death benefits from a defined contributions pension scheme (from 6 April 2015)

By Tolley
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The following Employment Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Death benefits from a defined contributions pension scheme (from 6 April 2015)
  • Introduction
  • Death before age 75
  • Death at age 75 or later
  • Nominees and successors
  • Charity lump sum death benefit
  • Dependant’s annuities

Introduction

The Taxation of Pensions Act 2014 made important changes to how money purchase pension funds can be dealt with following a member’s death. These changes apply to:

  • funds that have been designated to flexi-access drawdown but have not been withdrawn by the date of death
  • any remaining funds in capped drawdown
  • funds in defined contribution schemes which are yet to be crystallised

The changes are to the tax applicable which in many cases has now been eliminated altogether.

For the first time, and again it is emphasised only relating to defined contribution schemes, persons other than ‘dependants’ are able to inherit a member’s unused funds at death. The class of potential beneficiaries is now literally unlimited. Residual funds following death may be paid out in lump sum form or may be used as flexi-access drawdown funds on the part of the recipient. These changes apply where the first payment to the beneficiary (or beneficiaries) involved is on or after 6 April 2015.

Death before age 75

The tax position changed from 6 April 2015 so that where a defined contribution scheme member dies before age 75 and benefits are paid out after 5 April 2015, benefits paid (whether in the form of lump sum or income) are free from income tax so long as they are dealt with within two years of the member’s death. These provisions take the form of amendments to the FA 2004 provisions made by the Taxation of Pensions Act 2014, Schs 1, 2.

The extent of potential beneficiaries with regard to ongoing income payments has become unlimited. It is no longer restricted to those where there is dependency. The class of potential recipients is extended from a surviving spouse

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