Death benefits from a defined benefit pension scheme

Produced by Tolley in association with John Hayward
Death benefits from a defined benefit pension scheme

The following Employment Tax guidance note Produced by Tolley in association with John Hayward provides comprehensive and up to date tax information covering:

  • Death benefits from a defined benefit pension scheme
  • Introduction
  • Lump sum death benefits ― before benefits have been crystallised
  • Lump sum death benefits ― after benefits have been crystallised
  • Dependants’ pensions
  • Trivial commutation lump sum death benefit

Introduction

On the death of a scheme member or a beneficiary, a registered pension scheme is only authorised to pay out benefits to a beneficiary either as a pension death benefit or as a lump sum death benefit.

The type of benefits paid will depend on the scheme rules and the type of arrangement from which the benefits are being paid.

As with the payment of benefits in a member’s lifetime, the legislation sets out the authorised forms of pension and lump sum death benefits that may be paid following a member’s death, the circumstances in which those benefits can be paid, and the conditions and restrictions that the payments of the benefits must meet or follow in order for them to be authorised.

These are referred to in the legislation as ‘the pension death benefit rules’ and ‘the lump sum death benefit rules’.

Lump sum death benefits ― before benefits have been crystallised

Where a member of a defined benefit scheme dies before taking benefits, a lump sum death benefit of a set monetary amount or, as a multiple of salary, may be paid ― a ‘defined benefits lump sum death benefit’.

There is no limit to the amount of the defined benefits lump sum death benefit that can be paid from a scheme, but it will be tested against the (deceased) member’s lifetime allowance. Schemes may promise to pay a set amount of money on death or a lump sum death benefit linked to the salary of the member, or by some other measure. It is entirely a matter for the scheme to decide.

To exempt the payment from inheritance tax, the rules of the scheme usually provide that the lump sum shall be held on discretionary trusts, with the trustees of the scheme, then deciding who it should be paid to. The rules may or may not specify the category of people or entities that the trustees can consider as ultimate beneficiaries.

A defined benefits lump sum death be

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