Where an uncrystallised funds lump sum death benefit is paid, the lifetime allowance charge on any excess funds is at the rate of 55 per cent.

Where uncrystallised funds are used to provide a pension, they are providing an income so the lifetime allowance charge on the excess fund will be 25 per cent.

Although the benefits are tested against the deceased’s lifetime allowance (and does not use any of the recipient’s own LTA) it is the recipient who is responsible for any liability.

If the deceased had lifetime allowance protection this can be used to reduce or eliminate any lifetime allowance charge.

The scheme administrator must confirm to the representative the amount and date of any lump sums paid in relation to the member’s death and the percentage of standard lifetime allowance that the member had used up.

However, the deceased member’s personal representative has responsibility for establishing whether any lifetime allowance charge is due.

Spousal bypass trust

It is possible for death benefits to be paid into a discretionary bypass trust, often called a spousal bypass trust (SBT). 

The main reason a member would use a trust is to give them some control over what happens to their pension fund after their death. 

If the member leaves their pension to a beneficiary, it is the beneficiary who decides how to take the benefits (pension or lump sum if they are eligible for both). 

The beneficiary also decides what happens to any remaining funds on their subsequent death. 

With a trust the member chooses the trustees and makes them aware of their wishes for how the funds can be distributed, including on the death of the first beneficiary. 

This can be especially relevant with complicated family situations where members are concerned about their children losing out to their surviving spouse’s new partner or children/grandchildren. 

It may also give peace of mind to use a trust where benefits are left to children. 

If benefits are left in a pension then the child’s legal guardian will be responsible for managing the investments and making withdrawals, but when the child turns 18 they take full control and can access the whole fund. 

The member may want the child to have the benefit of the funds without this full access at age 18.

Charlene Young is a senior technical consultant at AJ Bell