Death benefits (before and after aged 75)


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)


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:


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

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



About Author

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Dubbed by friends and colleagues “The Pensions Professor”, John Reynolds is widely acknowledged as one of the country’s leading experts in the financial services education sector. He has spent 20 years teaching, consulting, mentoring and writing on the subjects of pensions and investments. John’s unique ability to take his years of experience and technical knowledge and present it in an easy to understand format, has resulted in his talents being very much in demand. His portfolio of corporate clients include CII, Lloyds, Scottish Widows, Santander and Wesleyan; as well as numerous IFA clients whom he provides technical consultancy, mentoring and training on client case studies and staff training.. He has put his extensive expertise (and heart and soul!) into developing the expertpensions (EPL) proposition. EPL is a structured and interactive technical exam training programme for IFAs. It's designed to give financial advisors the required technical knowledge, study strategy and exam technique to confidently sit and pass the AF1, AF3, AF4 and AF5 exams. Its online, it's fully supported, structured and designed to help advisers reach Chartered Financial Planner status quicker. It's ready to help your advisers reach chartered status

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