Taxation of pension death benefits

KEY POINTS

• Generally death benefits paid under registered pension plans are free of inheritance tax and are an effective tax planning tool.
• If benefits exceed the lifetime allowance there could be a 55% lifetime allowance charge on excess lump sum payments.
• The recipient of death benefits depends on whether the amounts are being paid as a lump sum or by way of a FAD account.
• Benefits paid to a bypass trust will be tax free if the scheme member dies aged under 75. No inheritance tax or income tax should apply to later capital payments made to a beneficiary.
• If the pension scheme member dies before 75 death benefits under both routes are free of income tax and inheritance tax.
• The relevant property rules...