Death benefits
How a SIPP can support a family even after the scheme member has passed away.
In the event of a member’s death, the way their fund is treated will depend upon their age at date of death and individual circumstances. The Scheme Administrator (or in the case of a SSAS, the SSAS trustees) has discretion over the payment of death benefits. Death benefits can be provided in the form of a lump sum, income drawdown and annuity.
From 6 April 2024, there is a limit on the total amount of lump sum death benefits that beneficiaries can receive free from income tax where the member has died before their 75th birthday. This is called the lump sum and death benefit allowance (LSDBA).
The following death benefit options apply from 6 April 2024:
| Member's age at date of death | Options at date of death | Taxation |
|---|---|---|
| Pre age 75 | Payments to the member's nominated beneficiary or beneficiaries |
Lump sums may be tax-free depending on individual circumstances. Certain lump sum death benefits must be tested against the deceased’s lump sum and death benefit allowance (LSDBA). Lump sum payments in excess of the deceased’s available LSDBA will be subject to income tax at the beneficiary’s marginal rate of tax. Please note: lump sum death benefits paid from funds crystallised before 6 April 2024 should not be tested against the LSDBA. For full details please read our guide on pension scheme benefit allowances. Annuities and drawdown pensions paid under beneficiary drawdown rules are not subject to marginal rate tax in the beneficiary’s hands. |
| Age 75 and over | Payments to the member's nominated beneficiary or beneficiaries | Subject to income tax at the beneficiary's marginal rate of tax whether taken as income or a lump sum If the beneficiary is not an individual, e.g. a trust has been nominated, benefits will be paid as a lump sum taxed at 45% |
| Any age | Payment to a charity | Not taxed provided there are no surviving dependants, it is paid in respect of the member's drawdown funds and to a charity nominated by the member. |
*Provided the lump sum payment or designation of funds for income is made within two years of the member's death. Any lump sum payments made after the two-year period will be taxed at the recipient's marginal rate.
Nominating beneficiaries.
Nominations are generally made under an 'expression of wishes' form. The nominations are not binding but the Scheme Trustee will usually take them into account.
Pensions can only be paid to named individuals who are the member's dependants or had been nominated by the member. Where the member has not made a nomination and has no dependant(s), the Scheme Administrator / SSAS Trustees can make nominations. It is, therefore, even more important that clients' nominations are kept up to date.
Cascading benefits.
If the nominated beneficiaries die whilst receiving benefits payable from the fund (following the member's death) it is possible for the benefits to continue to cascade to their beneficiaries and so on, until the fund has been exhausted. The tax treatment of cascading benefits will depend upon the age at death of the pension holder and then the subsequent age at death of the nominee or successors.
This allows members to pass pension funds down through generations with the funds remaining invested in a tax privileged environment.