If the member or beneficiary died on or after the age of 75 the new beneficiary will pay income tax on her marginal rate on the payments she receives from the fund.
Beneficiaries’ annuities and guarantee payments
The rules on flexi-access drawdown payments also apply where the residual fund is used to purchase an annuity. In addition, if the annuitant dies before the age of, any guarantee payments will be tax-free. After age 75, tax will be applied at the beneficiary’s marginal rate.
Beneficiaries scheme pensions
Where the beneficiary uses any remaining funds to buy a scheme pension, payments received will be taxed at her marginal rate as income. This applies to both money purchase scheme pensions and to pensions paid from a defined benefit scheme under the scheme pension rules.
Lump sum payments
Lump sum payments paid in respect of a member or beneficiary who died before the age of 75 will be tax-free. Although again if the designation is made after two years then any payment will be subject to a tax charge, which is currently 45 per cent but proposed to move to marginal rate from the tax year 2016/17.
If the payment related to a member who died on or after age 75 then it is taxable and again this is currently 45 per cent with the proposal to move to marginal rate in 2016/17.
Lifetime allowance
There will be a lifetime allowance test at death on any uncrystallised funds, based on the member’s lifetime allowance, but the tax charge is payable by the beneficiary or her proportion of it should there be multiple beneficiaries.
There are generally three tests that could apply, but only if the designation occurs within two years of the member’s death:
• BCE 7 – a lump sum payment, chargeable at a 55 per cent flat rate on the excess over the lifetime allowance;
• BCE 5C – beneficiaries flexi-access drawdown, a flat rate of 25 per cent of the excess over the lifetime allowance;
• BCE 5D – annuity purchase with the residual fund, a flat rate of 25 per cent of the excess over the lifetime allowance.
Inheritance tax
Pension death benefits will not normally be subject to inheritance tax regardless of the age of the scheme member at death. However, if pension benefits have been paid from the scheme by way of a lump sum to the member’s beneficiaries those funds form part of the recipient’s estate for IHT purposes. If the beneficiary chooses to opt for flexi-access drawdown with the fund then the residual fund will remain part of the pension scheme and outside their estate on their death.
