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  • Will your Death in Service payment result in an Inheritance Tax bill?

Will your Death in Service payment result in an Inheritance Tax bill?

A Death in Service payment is a lump sum of money that can be paid to a nominated beneficiary out of your pension scheme if a person dies before they retire. It is down to the individual employer to decide whether to offer a Death in Service payment; and the size of such payment. The deceased would normally have had the opportunity to nominate an individual or individuals to receive such a payment but Death in Service Trustees have ultimate discretion over the selection of the beneficiary.


Will your Death in Service payment result in an Inheritance Tax bill?If the deceased has nominated their Death in Service payment then this amount would normally pass outside the deceased’s Estate for Inheritance Tax purposes, often resulting in huge tax savings for the Estate. However, if the Death in Service has not been effectively nominated, or if the Trustees exercised their discretion to do so, the sum could be paid directly to the deceased’s Executors. If this were to be the case then this sum is likely to be subject to Inheritance Tax at the full rate of 40% and could result in an otherwise non-taxable Estate becoming taxable and, therefore, more complex and time consuming to administer.

Another factor to consider in the event that no nomination has been made, or that a nomination fails, is that if the sum is paid to the executors, it would then pass in accordance with the deceased’s Will or Intestacy. This could result in different individuals receiving the Death in Service payment than those originally intended or expected.

Further Reading:

Could a text become your will?

Probate & Estate Administration

Wills

 

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