Death Benefits

In April 2024 the government removed the Lifetime Allowance (LTA) from pensions and replaced it with the Lump Sum Allowance (LSA) and the Lump Sum Death Benefit Allowance (LSDBA).

These governed the maximum lump sum a member could receive from the schemes held during their lifetime and the amount available without excess charges applying on lump sums paid following the members death

A pension scheme is established to provide benefits to a member in retirement, but members life expectancy will vary and benefits within a scheme may remain when a member dies.

Since the introduction of pension freedoms in 2015, pensions are seen as a way to pass on wealth via generations in a tax efficient manner due to how the benefits may be paid.

How benefits are paid depend on the type of scheme plan a member has.

This article will look at the options available under the Hubwise SIPP and how SS&C process claims.

If the member dies with funds remaining in their pension, this will be distributed to a beneficiary of the scheme based on the expression of wish, details in the members will and supporting evidence from the executors of the estate and other parties’ input.

The final decision is taken by SS&C as administrators of the SIPP.

Please note that at present benefits can be released from the scheme without a Grant of Probate as the scheme falls outside of the members estate, this may change when the new rules relating to pensions and Inheritance tax are finalised.

Payments from the scheme may be paid tax free or taxed at the beneficiaries’ marginal rate, depending on how old the member was when passing and if the benefits have been settled within two years of notification, (2-year rule relates to members passing when under 75).

If the member dies before 75 any benefits paid will be tax free unless your benefits exceed the Lump Sum Death Benefit Allowance and benefits are taken as a lump sum rather than income drawdown.

If the member dies after 75 any benefits paid will be paid with tax deducted at the beneficiary’s marginal rate.

The beneficiaries designated can choose to take the pension benefits in a variety of ways, this does not matter if the original scheme was in drawdown or uncrystallised.

Here’s how they work.

• withdraw all the money as a lump sum, or
• set up a guaranteed income (an annuity) with the proceeds, or
• Take the benefits via income drawdown either with the current provider or a transfer to a new provider.

SS&C Hubwise will allow money to be paid as a lump sum, transferred to an annuity provider for a beneficiary’s annuity, (please note SS&C Hubwise do not offer annuities) and if the beneficiary is over 18, we will allow the establishment of a drawdown plan within the Hubwise SIPP.

If the beneficiary is under 18 and their guardians wish to establish a drawdown, at present they must transfer to a company that allows junior SIPPs to be established.

Please note that if the member does not have an expression of wish or the final beneficiary designated was not noted on the expression of wish in any form the options available are limited to payment via lump sum.

Please see the article on Expression of Wish & Beneficiaries for more information on this subject.

Following the passing of the member SS&C must be advised of the passing so that the process of designating funds may begin.

If the member dies under 75, we have two years to settle the claim from the date of notification to ensure all payments are made tax free, please note any changes following the introduction of inheritance tax on pensions will be updated accordingly.

The date of death and notification date are different, for example if the member passed on 1 January 2026 but the scheme was not notified until 1 January 2027, the payment clock starts on 1 January 2027.

If the member died after age 75 the two-year limit would not apply as benefits are taxable.

Once SS&C have been notified the following will occur:

• Adviser fees will be stopped as the agreement between the member and the adviser has been cancelled
• Contributions must be cancelled – any payments received after the members death will be returned to the account
• Income Payments if being made – these will be dealt with in two ways and will depend on two factors:
  1. If a payment is made after notification of death the payment should be returned to the pension scheme
  2. If payments were made after the members death but before notification the estate may retain the payments – please note if there is a large delay between death and notification the return of some payment may be required and will be discussed within the organisations death committee.

In order to settle any claim, we will require the following to be provided:

1. Death Certificate – has to be a full death certificate not an interim certificate, please ensure this is a certified copy if being added to a Freshdesk ticket.
2. A copy of the expression of wish – this will be held with SS&C if one had been completed.
3. A copy of the will – this should be certified by either the solicitor who drafted the will or from the IFA associated with the scheme.
4. A letter from the executors detailing any potential beneficiaries that may not be noted on the will or expression of wish.
5. Details of any benefits taken elsewhere to ensure the administrators are aware of the members remaining LSDBA.

All documents will be reviewed by SS&C as administrators of the scheme and determine who will be the beneficiary/ies will be,

Once the decision has been made the contact teams will liaise with the scheme adviser, executors and beneficiaries to determine how the benefits will be settled to each beneficiary.

The beneficiary can choose to take the benefits in a variety of ways, a lump sum, a drawdown pension, an annuity purchase or a combination of all three

There is no limit to the amount a beneficiary can take as a lump sum, but any payment over the LSDBA, or protected amount if Protections applies to the members benefits.

Fort example if the member did not have any protection and had not taken any pension benefits and the scheme value at the point of death was £1,200,000.00, this is £126,900 over the LSDBA and would be subject to the LSDBA excess tax charge if taken as a lump sum.

If the amount is paid via income drawdown or via a combination of options reducing the Lump Sum paid will have an impact on the possible tax charges if any may apply.

Full details of the LSDBA can be seen in the article on knowledgebase.

The member will have a number of options the most common are taking the benefits via drawdown in a dependents pension or via a lump sum, each of which have different issues:

Drawdown 

• Benefits remain in a tax-free environment
• Benefits do not form part of the beneficiary’s estate
• Benefits held will not be included in any possible means tested benefits
• Assets are held at market risk and assets can fall as well as rise
• Benefits can be passed on through the generations
• Benefits are not tested against the LSBDA when applied as a dependents pension.

Lump Sums:

• Form part of the beneficiary’s estate once paid and liable for inheritance tax depending on the size of the payment on beneficiaries’ death
• The payment will be treated as savings which would affect any means tested benefits
• Tax may be payable on the lump sum depending on the size of the payment and benefits in other pension schemes.
• If the beneficiary had a bankruptcy order against them the new payment would be available to settle any claims
• Additional investment advice may be required

A member may nominate another party who is not an individual, they can nominate a charity or a trust.

If a charity is nominated specific circumstances must apply:

• A charity lump sum death benefit can only be paid when there are no dependants of the member.  The meaning of dependant for this purpose does not have the extended meaning to include children who have reached age 23 on or after 16 September 2016.
• The charity must be nominated by the member prior to death.

For the purposes of the charity lump sum death benefit, a charity is one which meets the definition in paragraph 1 Schedule 6 Finance Act 2010 (The Finance Act 2010, Schedule 6, Part 2 (Commencement) Order 2012).  One requirement of this definition is that the charity is established for charitable purposes only.

A charity lump sum death benefit is not a relevant lump sum death benefit and therefore is not a relevant benefit crystallisation event. It does not use up any of either the deceased member’s or deceased beneficiary’s lump sum and death benefit allowance.

There is no tax charge on the scheme administrator of the pension scheme making the payment of a charity lump sum death benefit.

There is no tax charge on the charity receiving the payment so long as it is used for charitable purposes.

To make a payment to a trust it must be nominated by the member, and it must meet the following conditions:

• It’s a discretionary trust where an individual can place their lump sum death benefits into it.
• For more complex family circumstances where a simple nomination or expression of wish does not cover the situation.
• The individual sets up the trust and nominates the trust as their preferred recipient of the death benefits.
• Pension lump sums paid to a bypass trust will suffer a 45% tax charge if the pension scheme member dies after age 75.
• The 45% tax charge can be offset for the tax already paid.

In order to ensure that the beneficiaries are able to receive the benefits in the quickest and most tax efficient way possible it is important that the members Will and Expression of Wish are kept up to date and all documents are provided to the scheme administrators to review and designate the beneficiary.

Full details of all the members benefits are provided so that any payments are correctly 

The beneficiaries will require guidance on how to take the benefits to ensure they are taking benefits in the most tax efficient manner.

Beneficiaries may take advise from the adviser linked to the scheme, a third party adviser if they have one, if they don’t have an adviser one may be located via Unbiased Find a Qualified Pension Adviser to Help You Retire With Confidence.

Guidance may also be sought from Pension Wise: free pension guidance | MoneyHelper.