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HMRC internal manual

Pensions Tax Manual

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Member benefits: lump sums: pension commencement lump sums (PCLS): payment of pension commencement lump sum after death

Payment of pension commencement lump sum after death

Regulation 19 The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171

It can happen that a pension commencement lump sum is going to be paid under a scheme, but the member dies before any benefits are due under the scheme rules. In such cases, the scheme will often pay some form of death benefit instead of the lifetime benefits the member would have received had they lived longer.

However if the time for payment under the scheme rules has been reached, but the member dies before payment can be made, it becomes necessary to establish whether the member had indeed become entitled (under the tax rules - see PTM063220) to the payment of the pension commencement lump sum before they died:

  • if they had become entitled, then payment of the pension commencement lump sum may be made as with any other liability - to the estate of the deceased member - the lump sum (to the extent that the lifetime allowance is not exceeded) remains tax free on payment into the estate
  • if they had not become entitled during their lifetime, then at first sight the situation equates to the introductory paragraph above, and death benefits might be provided
  • there is however a third possibility, which Regulation 19 is intended to cover. This is where the scheme has a liability to pay the lump sum to the member, but they had not met the conditions required under the tax rules, to be considered to have become entitled to the payment of the lump sum during their lifetime.

An example of when the third possibility might arise would be where members were untraced at the time the scheme was bound to pay a pension commencement lump sum. If the scheme was unable to complete the required payment formalities until the member was traced and their bank details confirmed, then the scheme will not have been able to make the required payment so long as the member remained untraced. If the member dies before those formalities are completed, then ordinarily there would be no option to pay any authorised lifetime benefits such as a pension commencement lump sum at all. If the scheme cannot convert the liability into a regular death benefit, Regulation 19 provides that where certain conditions are met, the payment of the lump sum will be authorised and treated for tax purposes as a pension commencement lump sum subject to BCE 9. Those conditions are:

  • the payment is made to, or in respect of a member who has died (“to” means it was for them and goes into their estate, “in respect of” means someone else can get it because the member had built up the right to it)
  • the lump sum is paid from a defined benefits arrangement
  • the scheme administrator hadn’t established the member’s entitlement (i.e. completed formalities per PTM063220) to the payment until after the member’s death
  • the scheme administrator could not reasonably have been expected to make the payment before the member’s death
  • the payment would have been a pension commencement lump sum if it had been made immediately before the member’s death and the member had been entitled to it
  • the payment is made during the period of one year, starting on the earlier of the following dates:

    • the day on which the scheme administrator first knew of the member’s death, and
    • the day on which the scheme administrator could first reasonably be expected to have known of it, and
  • the member was at ‘arm’s length’ from any sponsoring employer of:

    • the scheme paying the lump sum, and
    • any other scheme that is both an occupational pension scheme and a registered pension scheme, which relates to the same employment as the paying scheme relates to (any ‘related scheme’)

A member is said to be at ‘arm’s length’ from a sponsoring employer if that individual is

  • not a ‘controlling director’ of a sponsoring employer (in relation to either the paying scheme or any related scheme), and
  • not ‘connected’ with a person who is a controlling director of a sponsoring employer (in relation to either the paying scheme or any related scheme).

A person is a ‘controlling director’ of a sponsoring employer if the person is a director of the company and is able to control 20 per cent or more of the ordinary share capital of the company (as set out in section 417(5)(b) of the Income and Corporation Taxes Act 1988).

How a person is ‘connected’ with another person is set out in section 993 of the Income Tax Act 2007. See PTM027000.

BCE9

The amount crystallised for the purposes of BCE 9 (see PTM088700) is the amount of the payment authorised by Regulation 19. The time at which BCE 9 is said to have crystallised is immediately before the death of the member.