When discussing categories of potential pension death beneficiaries, we often talk about individuals, trusts, and charities.
The last of these is, anecdotally at least, by far the least discussed, and it’s what I’ll be writing about here.
Many reading this will be aware that there is such a thing as a ‘charity lump sum death benefit’. However, there is some confusion about how these work in practice.
To explain the confusion, I’ll start by making a statement which sounds as though it’s been lifted from a lateral thinking puzzle: not all lump sum death benefits paid to charity, are charity lump sum death benefits.
To elaborate, a charity can be listed on an expression of wishes as a beneficiary in the same way as any individual or trust.
It’s worth checking with individual pension schemes to check whether they have any specific rules, but generally speaking, the same principles would apply: a person can nominate as many charities as they like, for any proportion of their pension, and with or without other beneficiaries listed alongside them.
When that person dies, his or her circumstances will determine how the lump sum to the charity is treated.
Two conditions
To be classed as a charity lump sum death benefit, two specific conditions have to be met. The first condition is that the deceased did not have any dependants. HM Revenue & Customs defines a dependant as one of the following:
- A spouse or civil partner
- A child under the age of 23
- A child who is 23 or over and dependent due to physical or mental impairment
- Any other individual who was financially dependent on the deceased, or dependent on the deceased due to physical or mental impairment.
It does not matter if the dependant does not want or need the money, or if they’re also receiving some of the death benefits.
The second condition is that the charity was nominated by the deceased on his or her expression of wishes. This means that if a pension scheme administrator has chosen the charity by exercising its discretion, the lump sum paid will not qualify as a charity lump sum death benefit.
If these two conditions are met however, then the lump sum will be classed as a charity lump sum death benefit. Where this is the case, the lump sum will not be taxable, even if the deceased was 75 or over.
It will also be exempt from the lifetime allowance test which would otherwise apply if the deceased was under 75, the funds were uncrystallised, and the death benefits were being paid within two years.
If the conditions aren’t met, then the payment is simply a normal lump sum death benefit which just happens to be going to a charity. All of the normal taxation rules will apply, according to the deceased’s circumstances.
Jessica List is pension technical manager at Curtis Banks