What happens on the death of a preserved member?
If a member has left the scheme and subsequently dies the scheme rules will define the benefits payable and the main ones for both defined benefit schemes and defined contribution arrangements are considered in turn.
If the member was made redundant or retired early on ill-health grounds, life cover may still be in place.
The procedure for dealing with death is similar to if the member died in service. The certificates are still required and family information to ensure that the benefits are paid out correctly.
Defined Benefit Scheme
The benefits payable on the death of a preserved member are normally:
Pension – A dependant’s pension based on a proportion of the member’s benefits when they left the scheme. The proportion is often 50%. These benefits are increased as per the scheme rules and current legislation up to date of death and they are made up predominately of two parts:
1. Guaranteed Minimum Pension (GMP) – if the scheme was contracted-out before 6 April 1997.
2. Excess pension – the amount above the GMP, if any.
The increases applied to each part depend on when the member left the scheme as they have changed over the years.
Refund – A refund of the member’s contributions may also be payable.
Defined Contribution Scheme
The benefits payable on the death of a preserved member of a money purchase arrangement including personal pensions are normally:
Lump sum – The value of the member’s fund may be paid as a lump sum at the discretion of the trustees;
OR
Pension – The value of the member’s fund may be used to purchase a dependant’s pension.
The dependant has the option of purchasing the pension on the open market and tailoring it to suit their circumstance; for example they can decide whether it should be:
Uncrystallised Funds
An uncrystallised death benefit arises where death has happened before the pension fund has been put in to payment for the member.
Death before age 75
There is no limit on the benefits that may be paid subject to the Lifetime Allowance. If the Lifetime Allowance is exceeded a Lifetime Allowance charge will be payable.
If however (as outlined in the earlier section on "Payment made after two years”) the uncrystallised funds lump sum death benefit is not paid within two years of notification of death, the payment will be subject to the recipient’s marginal rate of tax or, if not an individual, a special lump sum death benefit tax charge of 45% is payable.
Death after age 75
A benefit crystallisation event will have occurred at age 75 and so benefits will not be tested against the Lifetime Allowance again.
The uncrystallised funds lump sum death benefit will be subject to the recipient’s marginal rate of tax or, if not an individual, a special lump sum death benefit tax charge of 45% is payable.
