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Types of death benefit

Death benefits from a defined benefits scheme can be paid in several ways, but ultimately will be determined by the scheme rules, and whether the member was still in employment at time of death or had already started to take retirement benefits.

Broadly, benefits may be paid as a lump sum or a regular income.

Lump sums

Death benefits in the form of a lump sum can originate from:

• Life cover, such as a lump sum payment from death in service scheme (DIS). For example, the scheme might pay a lump sum death benefit expressed as a multiple of salary, e.g. 4 x salary. Generally, these are only paid if the member is still working for their employer.
• Pension protection lump sum, which can be paid if the member's pension in payment had value protection. Should the member die before pension payments have exceeded the crystallised value of the scheme pension, a lump sum representing the difference may be paid out.
• Trivial commutation. Small pensions payable to a dependant, following the member's death, can be commuted and paid as a one-off lump sum (known as a trivial commutation lump sum death benefit) if the value of the lump sum is £30,000 or less, and the lump sum represents and eliminates all the dependant's rights to death benefits under the registered pension scheme. This also includes the ability to commute the remaining instalments of a pension guarantee if the capitalised value is within the limit.

For more information on triviality, see our technical guide 'Triviality and commuting small pensions for cash'.

Regular income

Regular income may be paid out under:

• A dependant's scheme pension, following the death of a scheme member where a proportion of their pension can be paid to one or more dependants e.g. a dependant may receive 50% of the member's pension. These can be paid both before and after the member has taken retirement benefits.
• A pension guarantee, where the scheme pension might include a promise to pay the pension for up to 10 years, even if the member dies sooner.

Eligibility to receive death benefits

Legislation and the rules of a pension scheme will determine who can receive death benefits.

Lump sums 

• Life cover / pension protection lump sum: Both of these may be payable to anyone, including trusts, subject to the scheme rules.
• Trivial commutation: This can only be claimed by the dependant in receipt of the scheme pension unless the payments under a pension guarantee are being commuted, in which case the commuted lump sum can potentially be paid to anyone.

Regular income 

• Dependant's scheme pension
  Unlike income drawdown or lifetime annuities, which can pay income to a wide range of beneficiaries, a scheme pension can only be paid to a dependant of the scheme member. A dependant means the deceased member's:
  
  
  • widow(er) or civil partner
  • children under age 23*
  • anyone else who in the opinion of the scheme administrator was in some way dependent on the member at the time of death, such as unmarried partners or disabled relatives

  * A child over age 23 isn't normally classed as a dependant, but there are exceptions - the main one being where the adult child is dependent because of physical or mental impairment.

  A dependant's pension for a spouse or civil partner could cease on remarriage or when a new civil partnership is entered into. A dependant's pension for a child will cease when they're no longer classed as a dependant.

• Pension guarantee
  These can be paid to anyone, subject to the scheme rules.

Taxation of death benefits

Lump sums   

Lump sum death benefits paid from life cover (death-in-service benefits) or as a pension protection lump sum (from value protection) before age 75, and within two years of the trustees becoming aware of the member’s death, are tested against the deceased's 'lump sum and death benefit allowance' (LSDBA).

Any excess over the available LSDBA is subject to income tax at the recipient’s marginal rate, or 45% if paid to a trust.

In the unlikely event that a lump sum is paid out after age 75, the whole payment will be taxed at the recipient's marginal rate.

The LSDBA does not apply to trivial commutation lump sum death benefits.

For more information on the LSDBA, see our technical guide 'Lump sum and death benefit allowance' (LSDBA).

Regular income   

Dependants’ scheme pensions are taxed as earned income of the recipient - even if the member dies before age 75. The scheme administrator is responsible for deducting any income tax due under the usual PAYE procedures and for accounting to HMRC for that tax.

The remaining income payments paid for the balance of a pension guarantee period will be taxed as the recipient's income, irrespective of the age the member died.

Change in the IHT position from April 2027

From April 2027, most pension death benefits will be included in an individual’s estate for IHT purposes. However, death-in-service benefits, dependants’ scheme pensions, survivors' pensions under joint life annuities and charity lump sum death benefits to qualifying charities will not be included. Benefits paid to a spouse or civil partner will qualify for the spousal exemption.

So, for DB schemes, this means that only pension protection lump sums will be included for IHT purposes. These lump sums are fairly uncommon. 

Guaranteed minimum pension (GMP) and section 9(2B)

Schemes that had been contracted-out of the additional state pension prior to 6 April 2016 will contain GMP and/or Section 9(2B) rights. There are rules that determine how death benefits from contracted-out schemes are paid.

The minimum level of death benefits from these schemes will be the death benefits derived from the contracted-out benefit, but the scheme may choose to pay additional non-contracted-out death benefits to a scheme member.

Guaranteed minimum pension

Any member of a contracted-out DB scheme between 6 April 1978 and 5 April 1997 will have an entitlement to GMP. The death benefits payable from GMP rights depend on whether the member:

• is single or married/in a civil partnership
• leaves a widow, widower or civil partner, and
• dies before or after drawing their GMP

Married or in a civil partnership

Where the member is married, a surviving widow must normally receive a pension of 50% of the member's GMP. A surviving widower or civil partner must normally only receive a pension of 50% of the part of the member's GMP built up after 5 April 1988. There's no right to a widower's or civil partner's pension based on GMP built up before 6 April 1988.

GMP paid to a survivor can be stopped if they remarry or enter a new civil partnership before age 60 (women)/65 (men).

Post 6 April 1988 GMP must increase at 3%, but there's no requirement for any increases to pre-6 April 1988 GMP.

Single

If the member is single when they die, there will normally be no benefit payable from their GMP. The only exceptions may be where:

• the GMP rights are held within a money purchase environment, such as under a buyout contract (Section 32), in which case a lump sum death benefit might be available from the funds underpinning the GMP promise, or
• there's a pension guarantee attached to the GMP and the member dies after retirement within the guarantee period.

Section 9(2B) rights

Contracted-out benefits built up after 5 April 1997 are known as section 9(2B) rights.

Again, the death benefits payable from section 9(2B) rights depend on whether the member is married or in a civil partnership when they die. The surviving widow, widower or civil partner must normally receive a survivor's pension based on the deceased member's section 9(2B) rights. The rules are different depending on whether the member died before or after the scheme's normal pension age.

Death after the scheme's normal pension age

The survivor must normally receive a pension of 50% of the member's section 9(2B) rights pension at the date they died.

Death before the scheme's normal pension age (Married/ civil partners)

The survivor must normally receive a pension of 50% of the section 9(2B) rights pension that the member would have received at their normal pension age.

The only exceptions to these rules are if the survivor:

• was not married to, or in a civil partnership with, the member when the pension from their section 9(2B) rights came into payment (in which case a survivor's pension doesn't need to be paid), or
• was cohabiting with another person, as if married or in a civil partnership, when the member died (in which case a survivor's pension doesn't need to be paid), or
• remarries, enters a civil partnership, or starts cohabiting with another person as if married or in a civil partnership after starting to receive a survivor's pension from the scheme (in which case their survivor's pension can be stopped).

The survivor's section 9(2B) rights pension must increase in the following way:

• Pensions provided from section 9(2B) rights built up between 6 April 1997 and 5 April 2005 must increase in line with the RPI capped at 5%.
• Pensions provided from section 9(2B) rights built up after 5 April 2005 must increase in line with the RPI capped at 2.5%.
• Where the section 9(2B) rights are held as money purchase benefits in a buyout contract (section 32), no indexation in payment is required.

Death before the scheme's normal pension age (Single)

There will normally be no benefit payable from their section 9(2B) rights. The only exception may be where the section 9(2B) rights are held within a money purchase or mixed benefit environment, in which case a lump sum death benefit might be available from the funds underpinning the section 9(2B) rights promise.

Death benefit nominations

Scheme pensions can only be paid to the dependants of the original member, but the scheme rules will usually allow lump sum death benefits to be paid a wider range of beneficiaries.

The scheme member should complete a death benefit nomination/expression of wish to inform the scheme administrator of their wishes in relation to the payment of death benefits. This is especially important where the scheme member wants the death benefits paid to a non-dependant beneficiary as the scheme administrator may be unable to pay the death benefits to that person if they have not been named by the member. The death benefit nomination should be regularly reviewed to ensure that it continues to meet the member's wishes.

Trusts - in addition to dependants and individual beneficiaries, a DB scheme's rules may allow lump sum death benefits to be paid to a trust.

While a bare trust could be chosen, a discretionary trust (bypass trust) is more common as it gives the trustees of the member discretion over who receives the benefits and when.

For more details of the payment of death benefits into a trust, please see our technical guide, 'Bypass trusts'.