In a quick Q&A, the M&G Wealth technical team answer questions on pension death benefits and Lifetime Allowance rules
Q. When are benefits tested/not tested against the deceased’s LTA on death?
A. Whether or not benefits are tested for LTA purposes on death depends on the type of benefit (i.e. if from a defined benefit (DB) or a money purchase (MP) arrangement), the deceased’s age at date of death and whether the benefits are settled within the 2 year window, as illustrated in the following table:
*Benefits settled within the 2 year window are tax-free and tested against the deceased’s LTA, any benefits settled after 2 years will be taxable at the marginal rate of the beneficiary but there will be no LTA test. By ‘settled’ we mean paid as a lump sum, used to buy beneficiaries annuity or designated to beneficiaries drawdown, e.g beneficiary drawdown could be set up on a nil income basis. Providing this is done within the 2 year window, income turned on at a later date will be paid to that beneficiary tax free until the fund exhausts or they die, whichever happens first.
#There is no further LTA test for crystallised funds and any benefits paid as income are always tax-free, however benefits paid as a lump sum are only tax-free if settled within the 2 year window.
Q. Are beneficiary’s drawdown benefits ever tested again on the death of the dependant/nominee/successor or at age 75?
A. No, death benefits are only ever tested (if applicable) against the original deceased member, there are no further LTA tests at any point on the recipient of the benefits.
