IHTM17030 - Pensions: pension scheme benefits: what a pension scheme provides

A pension scheme generally provides retirement benefits and death benefits.

Retirement benefits provided by a pension scheme itself may include:

• a lump sum payment when the pension benefits are taken, known as a pension commencement lump sum,
• a secured pension, that is either a lifetime annuity or a scheme pension which pays an income for the rest of the person’s life, or
• if the pension is a defined contribution scheme (IHTM17020) a drawdown pension where the pension funds are accessed flexibly.

Death benefits are payable from most pension schemes where a scheme member dies before retirement or before taking any benefits. Where a person accesses their pension flexibly there are often death benefits available even after the person has started drawing benefits.

The death benefits may be in the form of a lump sum, payable to nominated beneficiaries, or a surviving spouse or civil partner’s or dependants’ pension or a combination of these. However death benefits may also be provided in the form of a flexi-access pension, where the funds remain within a pension wrapper and the beneficiary can then access those funds in a flexible way.

In some cases, the death benefits are payable to the deceased member’s estate. In others they are payable in accordance with the deceased’s member’s binding instructions. In either of these scenarios the death benefits will form part of the member’s estate for Inheritance Tax purposes in accordance with IHTA84/S5(2). Nevertheless it is most common to find that the death benefits are payable at the discretion of the scheme administrators, meaning that the death benefits do not form part of the member’s estate.

If an individual dies after retirement and is receiving secured pension or annuity income, there are unlikely to be any death benefits other than a pension for a spouse or civil partner. But there may be payments that continue after death if there is a guaranteed period of payment and these payments may be made to the estate. The guaranteed period is usually 5 or 10 years.

If an individual dies after retirement and has a pension fund that allows for income drawdown, the funds remaining on death may be used to provide lump sum death benefits or a surviving spouse or civil partner’s or dependants’ pension or a combination of these.

Lump sum death benefits may also be written into trust.

Depending on the rules of the pension scheme paying the death benefits, there may be IHT charges to consider (IHTM17051 onwards).