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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
, see all updates

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 on retirement and a pension. Another option is that the funds available at retirement may be used to purchase an annuity from an annuity provider. Secured pensions and annuities provide an income for life. In certain pension schemes though, a scheme member may choose instead to draw down income from the funds available, without securing an income for life. These arrangements are often used by individuals with other sources of income and capital who prefer the flexibility of taking pension benefits as and when they are needed.

Death benefits are payable from most pension schemes where a scheme member dies before retirement or before taking any 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. In some cases, the death benefits are payable to the deceased 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. 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 (IHTM17051onwards).