Question:

Can you clarify whether pension death benefits rules have changed under the new lifetime allowance replacement regime?

Paul’s answer:

The first thing to say is that, for clients over age 75, there hasn't been any change from the previous tax year. So, if the client dies after age 75 and their pension benefits are paid out, they will be fully taxable. If they're paid as beneficiary’s drawdown, then it's taxed as and when the funds are withdrawn.

Now let’s consider the position if the client dies before 75. If benefits are paid into beneficiary’s drawdown on death, it’s considered a pension even if a lump sum is taken afterwards. So, it's not tested at all. So, assuming the client dies before age 75, unlimited amounts can be paid into beneficiary’s drawdown and this can then be withdrawn tax free.

Outside of beneficiary’s drawdown, there are a few questions to be asked if a client dies before age 75. Firstly, are they crystallised benefits? If so, were they crystallised before the 6 April 2024? If the answers to these questions are ‘yes’, then there is no test. If they were uncrystallised benefits, or they were crystallised after the 6 April 2024, and they are paid as a lump sum, this is where we have to consider any remaining lump sum and death benefit allowance. If the payment is within the client’s remaining lump sum and death benefit allowance, then there is no tax charge. If the benefits exceed the remaining lump sum and death benefit allowance, the excess sum will be taxable at the recipient’s marginal rate.

Important information

This article provides information and is only intended to provide an overview of the current law in this area and does not constitute financial advice, tax advice or legal advice, or provide any recommendations. The value of benefits depends on individual circumstances. The minimum age clients can normally access their pension savings is currently 55, and is due to rise to 57 on 6 April 2028, unless they have a lower protected pension age. Different options may have different effects for tax purposes, different implications for pension provision and different impacts on other assets and financial planning.

Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited.

UKM0524/386857/SSO/0525