Charity lump sum death benefits

When a member of a defined contribution pension dies, it’s possible for the death benefits to be paid to a charity. If certain conditions are met, then this payment will be completely tax free, regardless of the size of the fund or age of the member on their death.

As part of our Bitesize Technical series, Senior Technical Consultant, Lisa Webster looks at when a lump sum payment qualifies as a charity lump sum death benefit.

Key insights on charity lump sum death benefits

Nomination

To be classed as a charity lump sum death benefit on a member’s death, the member must have nominated the charity in their lifetime – it isn’t possible for family members or the scheme administrator to nominate the charity after the member has passed away.

Dependants

A charity lump sum death benefit can’t be paid if the member had any dependants. This means, for married couples who want to leave some of their pension to charity, it may be more tax-efficient for the charity if the payment is on the second death.

Tax treatment – death before age 75

The advantage of a charity lump sum death benefit when the member dies under the age of 75 is that it won’t be tested against the deceased’s available lump sum and death benefit allowance (LSDBA). This means the size of fund that can be passed on tax-free is unlimited.

Tax treatment – death at or after age 75

When the member dies on or after their 75th birthday, the charity lump sum death benefit can still be paid completely tax free to the charity. This contrasts with other death benefit options, which are all subject to tax.

Paying death benefits to charity when the conditions aren’t met

If the conditions aren’t met (for example the member has a surviving spouse), this doesn’t mean the death benefits couldn’t be paid to a charity – it just means they would be treated like any other lump sum death benefit payment. If the member died before the age of 75 and has sufficient LSDBA available, the payment will be tax-free anyway, so it makes little difference.

However, if the member dies at 75 or older, the special lump sum death benefit charge of 45% would apply.

If there’s a dependant, the trustee would likely want to see evidence that they were financially secure before paying the death benefits away from them in favour of a charity.

More Bitesize Technical

Get stuck into ‘Death benefits overview’ – the next instalment of our pension death benefits Bitesize Technical series.