This is the biggest area of change post-6 April 2015.
There could be two BCE’s (Benefit Crystallisation Events) where death benefits will be tested:
BCE 7: Where a lump sum is paid on the death of the member before/after age 75
BCE 5C&D: These are new benefit crystallisation events. It applies if the original member dies before age 75 and uncrystallised funds are designated, within two years of death, to provide FAD drawdown (5C) or lifetime annuity (5D) for a nominee.
This is one of the areas with most change, particularly for money purchase/defined contribution schemes where distinction between crystallised and uncrystallised funds no longer exists.
The tax treatment will be assessed ONLY on the deceased’s age at death.
These changes have massive significance.
Death before 75 (post-April 2015)
Taxation
For all funds in flexible defined contribution/money purchase schemes and remaining after death, whether crystallised or uncrystallised, they can be taken EITHER as a tax free one-off lump sum (BCE 7) (shown in the table) OR as a tax-free pension income in shape of FAD or pension annuity (BCE 5C and 5D).
This is a big change. It removes the current 55% tax charge on crystallised funds lump sums payments AND any income tax on payments received from these funds.
These changes have massive significance.
2 year period
For uncrystallised funds, tax-free only applies if the lump sum is paid or the funds are designated for drawdown within two years of death (for 99% of cases this will be plenty time). A lump sum paid from uncrystallised funds after two years will be subject to a 45% tax charge during tax year 2015/16 and likewise, income from uncrystallised funds designated for drawdown after two years will be subject to income tax.
These new rules will apply to payments which start after 6 April 2015 (not date of death). But, if a dependant’s pension has started pre 6 April 2015, it’s bad news: the payments will continue to be taxable.
Death aged 75 (post-April 2015)
Taxation of both income and lump sum options taken by nominees:
Income
Defined contribution pension funds taken as FAD (flexi-access drawdown) or lifetime pension annuity, will be taxed at the beneficiary’s marginal rate as they draw income from it (see the difference between that and pre75, where the income is tax free).
The dependants/nominee income is taxable.
Lump sum
A lump sum can be paid less a 45% special lump sum death benefits tax charge.
This is all summarised in the table below:
Tax treatment of death benefits paid (within 2 years) after 5 April 2015 following the member’s death: Summary of new rules
| FUND | TAX | BCE |
| Member or Beneficiary dies before age 75: Lump sum paid | ||
| Uncrystallised | Tax-free if paid within 2 years | • Yes; lump sum BCE 7 |
| Crystallised | Tax-free if paid within 2 year window | No and no tax charge |
| Crystallised/uncrystallised | 45% tax if outside 2 year window | No, but special lump sum death benefits charge applicable |
| Member/Beneficiary dies before age 75: FAD and/or Annuity income | ||
| Uncrystallised | Tax-free income if designated within 2 year window | • Yes, income tested as the BCE 5C or 5D |
| Crystallised | Tax-free income if designated within 2 year window | No and no income tax charge |
| Crystallised | Income tax if outside 2 year window | No |
| Member/Beneficiary dies age 75: Lump sums | ||
| Uncrystallised | 45% tax | No, but special lump sum death benefits charge applicable |
| Crystallised | 45% tax | No, but special lump sum death benefits charge applicable |
| Member/Beneficiary dies age 75: FAD or Annuity Income | ||
| Uncrystallised | Income tax on the beneficiary | No |
| Crystallised | Income tax on the beneficiary | No |
