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HMRC internal manual

Inheritance Tax Manual

Pensions: alternatively secured pensions: how ASP funds can be used

The fund left over on death cannot be paid out as a lump sum without tax consequences but it can be used in the following ways:

  • If the deceased member had dependants, to provide pension benefits for one or more of those dependants (including their spouse or civil partner).
  • If the deceased member died before 6 April 2007 with no dependants the funds can stay in the scheme to provide benefits for other scheme members nominated by the deceased or selected by the scheme administrator (a transfer lump sum death benefit). A transfer lump sum death benefit cannot be paid in respect of a member who dies on or after 6 April 2007.
  • Where there are no dependants the funds can be paid to a charity nominated by the deceased member. If the member does not nominate then the scheme administrator can.
  • For occupational schemes, if the deceased member had no dependants and neither the second nor third bullet above apply the funds become ‘surplus’ and can be repaid to the employer, subject to a tax charge, provided the deceased employee was not connected to the sponsoring employer.

In other cases Income Tax charges will apply.

The type of pension that may be paid to a dependant will depend on the type of arrangement held by the scheme member. If the dependant is under age 75 they can have a dependant’s scheme pension, dependant’s annuity or dependant’s unsecured pension. There is no timing requirement under the pension rules to say that any of these must come into payment immediately on the death of the scheme member: so the pension may not come into payment for some time after the member’s death. For example, schemes might delay the start of the dependant’s benefits if the member has died during the period of guaranteed payment, in which case the dependant’s pension might only start when the member’s guaranteed pension payments stop. Further dependant’s benefits (on the death of a dependant) cannot be paid to a dependant of the dependant. They can only be paid to a dependant of the deceased scheme member.