What happens in the case of death after retirement?
In this section we will look at the benefits that may be payable if a member dies who is retired and is in receipt of a pension.
Stop the pension
The pension should be stopped immediately and the death certificate obtained.
If the pension was paid in advance the trustees or the insurance company are obliged to reclaim the amount in respect of the period after the date of death so the family will receive a letter requesting this.
Pension Protection Lump Sum
For members of defined benefit schemes a lump sum may be payable known as the pension protection lump sum.
When the member retired the pension was guaranteed to be paid for a certain number of years (normally 5 years) and if death occurred before the period expired, the balance of the remaining period is paid as a lump sum.
The scheme rules will normally set limits on who they will pay this benefit to and the trustees will refer to the member’s expression of wish form to assist with their decision.
Inheritance tax will not apply if the payment is made at the trustees’ discretion.
This benefit is not tested against the Lifetime Allowance but there is a maximum amount, which if exceeded, is subject to a special lump sum death benefit charge.
The scheme administrator or insurance company is liable for the charge and may deduct tax depending on how old the member was when they died.
If the member was under age 75 when they died, the lump sum payable is tax free. If the member was aged 75 or over when they died, a special lump sum death benefits charge at the rate of 45% is due on the payment.
Annuity Protection Lump Sum
This lump sum will only be provided if the deceased member was in receipt of a pension as a lifetime annuity or a scheme pension from a money purchase pension or cash balance arrangement.
If the member chose a guaranteed period when they retired and they die before that period has expired, the balance is paid as a lump sum.
DC Scheme Dependant’s Pension
In a defined contribution scheme or other type of money purchase arrangement the member may have purchased an annuity when they retired.
At that time they had the option of purchasing a joint life pension.
If a joint life pension was purchased then their dependant will receive the amount stated. If the joint life pension was purchased "with overlap” then they may receive two payments for a period of time.
1. The dependant’s pension they are entitled to, paid until they die; and
2. The balance of the guaranteed pension continues to be paid in pension form (as opposed to an annuity protection lump sum).
In other words the member’s pension continues to be paid to the dependant until the end of the guarantee period.
If the member had chosen a single life pension at retirement then all payments cease on their death.
DB Scheme Dependant’s Pension
In a defined benefit scheme the dependant’s pension is normally a percentage of the member’s pension before any was commuted for a Pension Commencement Lump Sum.
The amount is often 50%.
As with death in service dependant’s pensions, the scheme rules will state who is classed as a dependant and their birth and marriage certificates will be required before this pension can be set up.
Drawdown Pension Fund Lump Sum
If a member receiving a drawdown pension dies then the remainder of the fund may be paid as a lump sum. It cannot be more than the value of the fund left when the member dies including any investment growth.
A Drawdown Pension Fund Lump Sum is only payable in respect of capped drawdown that began on or before 5 April 2015.
The deceased member may have taken independent financial advice to limit the inheritance tax liability by setting up a trust. Inheritance tax planning is a specialist area and any queries from relatives regarding this should be referred to the member’s adviser.
Inheritance Tax
This is paid when someone dies if the value of their estate exceeds the Inheritance Tax threshold which is currently £325,000 for the 2017/18 tax year.
The estate includes:
The tax charge is:
Married couples and civil partners can increase the threshold, up to a certain limit, when the second partner dies.
Executors or personal representatives must transfer the first spouse or civil partner’s unused Inheritance Tax threshold to the surviving spouse or civil partner when the first spouse or civil partner dies.
It is recommended that specialist advice is taken for Inheritance Tax planning.
Who pays inheritance tax?
The executor or personal representative must pay any Inheritance Tax due from the person’s estate within 6 months of the member’s death. A
fter this, interest will be charged on any amount outstanding.
Some or all of any Inheritance Tax due must be paid before a grant of probate can be issued.
The executor or personal representative may have to borrow money to meet this liability as it is common for the money from the estate to be tied up in assets that have to be sold, for example – the house.
Inheritance Tax generally comes out of a deceased’s estate before the inheritance amount is passed on.
A beneficiary or "donee” will usually owe Inheritance Tax if:
A beneficiary or "donee” has to pay Inheritance Tax if they:
EXAMPLES
Gifts
Someone gives you a gift and they die less than 7 years later. The value of the estate, including the gift, is over the Inheritance Tax "IHT” threshold and there is not enough money in the estate to pay the tax.
You must pay the Inheritance Tax on that gift.
Joint Property
Someone dies and they are a joint tenant with you but you are not their spouse or civil partner.
IHT is paid on the deceased’s share of the joint property if the total value of their estate is over the threshold.
As the surviving joint owner you are responsible for paying the tax.
If the deceased’s will stated that the joint property is held as "tenants in common” and should be given "free of tax”, the IHT will come from the rest of their estate.
However, if there is not enough money in the estate you will have to pay the difference.
