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Pensions and Death Benefits – CII R04, AF7 J05

Pensions and Death Benefits – CII R04, AF7 J05

In our last three articles on pension decumulation, we looked at drawdown and uncrystallised funds pension lump sum (UFPLS) retirement options, and at the money purchase annual allowance. In this article we will take a look at death benefits post April 2015 .

Death BEFORE age 75

Lump Sum (if benefits have not yet been crystalised the total death benefits will be tested against the lifetime allowance with the excess subject to 55% tax):

  • Paid tax free
  • The lump sum must be paid out within a two year window otherwise it will be taxed at the recipient’s marginal rate of income tax
  • Lump sum option available to any beneficiary

Income:

  • Tax free if income taken via an annuity
  • Tax free if income taken via flexi-access drawdown
  • Funds must be designated to an income producing contract within a two year window otherwise the income will be taxed at the beneficiary’s marginal rate of income tax
  • Annuities and income taken via flexi-access drawdown are open to any beneficiary (dependant/nominee/successor)
  • Scheme pension however will still be taxed at the beneficiary’s marginal rate – and is still only available to dependants

Death On or AFTER age 75

Lump Sum:

  • Taxed at recipients marginal rate (45% for trustees/personal representatives)

Income:

  • Will be taxed at the beneficiary’s marginal rate if income taken via an annuity/flexi-access drawdown/a scheme pension
  • Annuities and income taken via flexi-access drawdown are open to any beneficiary (dependant/nominee/successor)
  • Scheme pension only available to dependants

In the event of the death of a member of a defined contribution scheme (who does not have a scheme pension), the pension can be paid to any beneficiary nominated by the member (the nominee), and the nominee(s) can in turn nominate a successor to receive a pension in the event of their death.

Please note that uncrystallised funds pension lump sum (UFPLS) is not available as a death benefit option. Also note that the lifetime allowance applies, so when lump sum death benefits are paid on the member’s death before age 75 they will be tested against the lifetime allowance, and any excess will be subject to the lifetime allowance excess charge in the normal way. However, if a beneficiary inherits a pension fund, it won’t count towards their own LTA.

Over to you!

Try the exam question below (from our R04 mock paper):

Sam died in June 2019 at the age of 76. His only pension is an unused personal pension. Sam’s nominated beneficiary is his son Colin, who is 47.  Colin decides to take the pension fund as a lump sum and this is paid to him in September 2019.  With regards to the tax treatment of the death benefits it is correct to say that the lump sum is:

A.  subject to the special lump sum death benefits charge of 45% and there is a test against Sam’s remaining lifetime allowance.

B.  taxable as Colin’s income and there is no test against Sam’s remaining lifetime allowance.

C.  paid free of tax, but there will be a test against Sam’s remaining lifetime allowance.

D.  paid free of tax and there will be no test against Sam’s’ remaining lifetime allowance.

Answer B: Sam is over 75 at the time of his death, and we are considering here unused pension benefits paid within 2 years of death, so the pension lump sum death benefits will not be tested against his remaining lifetime allowance (because it was already tested when Sam turned 75) but will be subject to tax as Colin’s pension income. The 45% charge is only applicable where the benefits are paid to a trustee or legal personal representatives.

Grab the resources you need!

If you’re studying for your CII R04 exam, and you’re wondering how you’ll ever manage a pass, grab our free taster to try out one of Brand Financial Training’s mock exam papers for yourself.  Click the link to download the R04 mock exam taster now!

https://brandft.co.uk/cii-r04-ro4-pensions-and-retirement-planning/

Related Articles:

Pension Flexibility – The New Drawdown Regime – CII AF3, R04 and J05

A Look at the Uncrystallised Funds Pension Lump Sum (UFPLS)

Money Purchase Annual Allowance (MPAA) – CII AF3, R04, J05

Annuity Rule Changes – CII AF3, R04, J05