Inheriting a DC pension is relatively straightforward when it is compared to DB schemes. As a beneficiary, you can inherit unused drawdown or uncrystallized money to purchase funds and have flexibility on how you choose to withdraw the money. Options include lump sums, drawdown and a lifetime annuity.
In this blog, I want to cover what happens when someone dies and they have a pension scheme, which most people in the UK should have automatically due to the new rules and legislation from the Government.
If you are looking for related pension articles, please see some recommendations below:
- 5 Reasons Not to Transfer a DB Pension
- Pension Q&A: Transferring a Pension in Your 30s
- Pensions and Lifetime Allowance
- UK Expats Self Invested Pension (SIPPs)
Who Can Inherit Death Pension UK?
Unlike a DB plan that can be regulated and have restrictions on whom can inherit the plan. Benefits of DC can be paid to any dependant and the nominated beneficiary if no nominated beneficiary it will then be selected by the scheme or select a successor.
With an annuity, it can only be passed on to a chosen beneficiary.
A dependant is qualified on the following criteria:
- Financially dependant under the age of 23,
- or have attained the age of 23, and or is a dependent owing to physical or mental disability at the time of the member’s death.
Are Pension Death Benefits Taxable?
The pension and taxes depend on when the deceased died and can be split into two sections.
If you died before the age of 75 or after the age of 75.
In the case of a member’s death in service, schemes may pay a lump sum to the member’s beneficiaries. The lump-sum would be tax-free, except for the LTA (Lifetime Allowance) tax charge of 55% for lump sums paid over the LTA if the member died before the age of 75.
What Happens to My Pension if I Die Before 75?
If the deceased died before the age of 75 then lump sums that are paid within two years are tax-free under the LTA limit. Anything over the LTA limit is taxed at 55%. If the lump sum is not paid within two years then is taxed at beneficiaries the ordinary rate.
Annuity payments would stop unless provisions such as a guaranteed period and then would finish the garmented period.
In a flexi access drawdown pension, any money paid within two years will incur no income tax.
What Happens to My Pension if I Die After 75?
If the deceased was over 75, any lump sum is taxed at the recipients marginal rate and is not tested against the LTA (as will have been tested at the age of 75).
Flexi access is paid to the beneficiary and is taxed at the recipient’s marginal rate.
Summary
This is can be a tricky part of life, when someone dies and gathering assets and understanding what gets taxed, how it gets taxed can become a very confusing area.
You have the standard IHT rates and they are applied if you are an expat or not because they tax worldwide assets.
If you are wanting some clarification or help please email me at info@investmentsforexpats.com
