Technical Q&A: Pension Death Benefits – Part 1: Payment options
14 October 2020
The Prudential Technical Team answer some of the questions that have been asked recently of the Prudential’s support team in respect of death benefit payment options.
Q. My client’s husband has passed away and she is the beneficiary. She wants to use dependant’s drawdown but the current provider’s scheme doesn’t offer this. Can she transfer to another provider that does?
A. No, you can’t transfer a death benefit. The beneficiary must initially go into drawdown in the same scheme the deceased member was in when they died. There is nothing in the legislation that explicitly says this but this can be deduced from the rules that confirm what constitutes an allowable death benefit (Sections 167 & 168 and Schedules 28 & 29 Finance Act 2004) and those which confirm what a recognised transfer is (Section 169 Finance Act 2004). If the current scheme doesn’t offer drawdown her only options are a lump sum or a dependant’s annuity in line with what the scheme are offering.
It may be that the scheme will offer a beneficiary income option on a ‘notional’ basis which would allow the beneficiary to designate the death benefit to drawdown in their scheme and then immediately request a drawdown to drawdown transfer to another provider/ arrangement. This is sometimes referred to as ‘blink of an eye’ drawdown. This is not mandatory and will depend on each scheme’s own rules and the provider’s business processes.
Q. In respect of the previous question, is this the same answer whether the death benefit funds were coming from crystallised or uncrystallised funds?
A. Yes, either way, the beneficiary needs to be able to designate to dependant/ nominee drawdown in the existing scheme and cannot transfer a death benefit directly to a new provider.
Q. My client died aged 77 leaving an uncrystallised pension fund of £720,000. Is the widow entitled to 25% of this tax-free, as the client did not take their pension commencement lump sum (PCLS) before death?
A. No. PCLS is a retirement benefit. The full £720,000 represents a death benefit and, as death occurred after age 75, the widow must pay tax at their marginal rate on any payments they receive from this.
Q. My client has taken an income payment from a dependant’s flexi-access drawdown plan. Does this mean she has triggered the money purchase annual allowance?
A. No, taking income from a dependant/nominee/successor’s drawdown plan doesn’t trigger the MPAA.
Q. What is the minimum age for taking income from dependant / nominee / successor drawdown pots?
A. These are not linked to normal minimum pension age. There is no minimum age for taking income from inherited death benefits.
Q. I have a client who is separated from her husband and has not nominated her adult non-dependant children, if she dies what options would be available to them?
A. As she is not divorced, her husband will be classed as a dependant (HMRC definition) even though they are separated, so although the scheme administrator could choose to pay to the children they will only be able to offer the lump sum option if the children aren’t nominated as the member has a living dependant.
Q. What death benefit options must any existing pension scheme offer and can they be challenged for not offering an option allowed within legislation?
A. It is up to each scheme to communicate the death benefit options it will provide. Flexible death benefit options introduced 6 April 2015 do not apply to defined benefit schemes, and are not mandatory for defined contribution schemes.
Q. Can any scheme, including a defined benefit scheme, use the permissive statutory override (Finance Act 2004, Part 4, Chapter 7, Section 273B) to offer flexible death benefits otherwise not permitted in their scheme rules?
A. Any defined contribution scheme may choose to apply the permissive statutory override. However, no defined benefit scheme may provide flexible death benefit options.
Q. Can a Pension Sharing Order be applied to a dependant, nominee or successor drawdown plan?
A. No, legislation does not allow this. The fund/ income may be taken into account as part of a divorce settlement but it is not possible to physically share this type of pension benefit.