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HMRC internal manual

Pensions Tax Manual

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Death benefits: essential principles

Glossary PTM000001
   

 

Authorised benefits payable on death
Authorised pension death benefits
Authorised lump sum death benefits
Authorised death benefits and the lifetime allowance
Transitional provisions for child dependants aged 23 or over

Authorised benefits payable on death

Sections 167 and 168 and Schedules 28 and 29 Finance Act 2004

Payments made on the death of a member or a beneficiary from a registered pension scheme are within the authorised member payment definition (as they are made ‘in respect of’ that individual’s membership of the scheme).

On the death of a scheme member or a beneficiary, a registered pension scheme is only authorised to pay out benefits to a beneficiary following the death in two forms, either as a pension death benefit or as a lump sum death benefit. The type of benefits paid will depend on the scheme rules and the type of arrangement the benefits are being paid from.

As with the payment of benefits in a member’s lifetime, the legislation sets out:

  • all the authorised forms of pension and lump sum death benefits that may be paid following a member’s or beneficiary’s death,
  • the circumstances in which those benefits can be paid, and
  • the conditions and restrictions that the payments of the benefits must meet or follow in order for them to be ‘authorised’.

These are referred to in the legislation as ‘the pension death benefit rules’ and ‘the lump sum death benefit rule’, with the latter listing and defining the various authorised lump sum death benefits that can be paid.

Any payment made following the member’s or beneficiary’s death that does not meet one of the definitions of authorised payments laid out in these rules is an unauthorised member payment and taxed accordingly. See PTM131000 for more detail on unauthorised payments and the associated tax charges.

Depending on the circumstances (in particular what the scheme rules allow and type of benefit) it is possible for a mixture of death benefits to be provided under a registered pension scheme and for the benefits to be provided to more than one recipient. Where there is more than one recipient the tax rules do not require them all to receive the same type of death benefit. The level of choice available will depend on what the scheme rules allow.

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Authorised pension death benefits

Section 167 and paragraph 15 Schedule 28 Finance Act 2004

The pension death benefit rules deal with the payment of pension benefits following the death of a scheme member or a beneficiary of a scheme member. These set out the various ways a pension benefit may be paid and in what circumstances.

The types of pension death benefit that may be paid are as follows:

  • a dependant’s scheme pension. This pension death benefit is payable from both a defined benefits arrangement and a money purchase arrangement - see PTM072100
  • a beneficiary’s annuity. This pension death benefit is payable from a money purchase arrangement only - see PTM072200
  • a dependants’ drawdown pension. This pension death benefit is payable from a money purchase arrangement only. The dependant must have become entitled to it and have designated sums or assets to a dependant’s drawdown pension fund before 6 April 2015. The drawdown pension can take the form of either dependants’ income withdrawal or a dependants’ short-term annuity or a combination of the two - see PTM072300
  • a beneficiary’s flexi-access drawdown pension. This pension death benefit is payable from 6 April 2015 and from a money purchase arrangement only. The beneficiary must designate sums or assets to a flexi-access drawdown fund for their own benefit. The pension can take the form of either beneficiary’s income withdrawal or a beneficiary’s short-term annuity or a combination of the two - see PTM072400.

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Authorised lump sum death benefits

Section 168 and Part 2 Schedule 29 Finance Act 2004

Various types of authorised lump sum death benefits are listed in the lump sum rule. Each of these authorised lump sum payments has a different set of prescribed characteristics. Some are paid tax-free (subject to available lifetime allowance), and some are subject to specific tax charges.

The circumstances and conditions defining these payments are set out in the legislation. The type of lump sum death benefit payment that can be made under an arrangement varies depending on the exact circumstances and the type of arrangement involved.

The types of lump sum death benefit that may be paid are:

  • defined benefits lump sum death benefit: a lump sum paid following the death of a member. It is payable from a defined benefits arrangement only - see PTM073100
  • pension protection lump sum death benefit: a lump sum paid in certain circumstances following the death of a member whose scheme pension was in payment when they died. It is payable from a defined benefits arrangement only - see PTM073300
  • uncrystallised funds lump sum death benefit: a lump sum paid following the death of the member from funds that have not paid out any benefits at that point in time and which is not a charity lump sum death benefit. It is payable from a money purchase arrangement only - see PTM073200
  • annuity protection lump sum death benefit: a lump sum paid following the death of a member who was receiving either a lifetime annuity or a scheme pension at the time of their death. It is payable from a money purchase arrangement only - see PTM073400
  • drawdown pension fund lump sum death benefit: a lump sum paid on the death of the scheme member or a dependant in respect of income withdrawal paid from a drawdown pension fund for the scheme member or dependant and which is not a charity lump sum death benefit. It is payable from a money purchase arrangement only - see PTM073500
  • flexi-access drawdown fund lump sum death benefit: a lump sum paid on the death of the scheme member or beneficiary in respect of income withdrawal paid from a flexi-access drawdown pension fund for the scheme member or beneficiary and which is not a charity lump sum death benefit. It is payable from a money purchase arrangement only - see PTM073600
  • charity lump sum death benefit: a lump sum paid to a charity following the death of the scheme member or beneficiary. Such a lump sum cannot be paid whilst there is still a surviving dependant of the member. It is payable from a money purchase arrangement only - see PTM073900
  • trivial commutation lump sum death benefit: a lump sum of no more than £30,000 paid to a dependant entitled to a dependant’s scheme pension or an individual who is entitled to continuing payment of the member’s pension after the member’s death under the terms of a guarantee. It is payable from both a defined benefits arrangement and a money purchase arrangement - see PTM073700
  • winding-up lump sum death benefit: this was a lump sum up to £18,000 which was payable on or before 5 April 2015 and was a lump sum paid instead of their pension to a dependant of the member because the scheme was being wound up and which extinguishes their rights under the scheme. This type of lump sum could have been paid from either a defined benefits or a money purchase arrangement. From 6 April 2015 a trivial commutation lump sum death benefit can be paid where the scheme is being wound-up. For guidance on winding-up lump sum death benefits, see PTM073800.
  • life cover lump sum: a lump sum death benefit paid following the death of a member after they reached age 75 and whose scheme before 6 April 2006 allowed lump sums to be paid in respect of funeral expenses or funeral grants - see PTM074000.

PTM073010 explains the tax charges when a lump sum death benefit is taxable.

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Authorised death benefits and the lifetime allowance

Sections 216 and 217(4) and paragraphs 2 and 16 Schedule 32 Finance Act 2004

Some of the types of death benefits payable as authorised member payments are benefit crystallisation events that could trigger a lifetime allowance test.

These include, in respect of the death of a member aged under 75, the payment (within the relevant two-year period) of:

  • a defined benefits lump sum death benefit (BCE 7),
  • an uncrystallised funds lump sum death benefit (BCE 7),
  • on or after 6 April 2015, the designation of relevant unused uncrystallised funds as being available for the payment of flexi-access drawdown pension to either a dependant or nominee (BCE 5C) - see PTM088000, and
  • on or after 6 April 2015, a sum from unused uncrystallised funds which is used to purchase a dependants’ or nominees’ annuity (BCE 5D) - see PTM088660.

The payment of any other type of pension death benefit or lump sum death benefit is not a benefit crystallisation event so does not give rise to a lifetime allowance charge. However in the case of some death benefits there may be an income tax charge. The detailed guidance for each type of benefit sets out how it is treated for tax purposes.

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Transitional provisions for child dependants aged 23 or over

Paragraph 15(2)(c) and (d) Schedule 28 Finance Act 2004

Articles 34 - 34B The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

A pension scheme that was deemed to be a registered pension scheme on 6 April 2006 (see PTM031300) may pay a dependant’s pension to a child of the deceased member after that child has reached age 23, in either of two sets of circumstances, namely:

  1. young adult children of the deceased member who are either continuing in further education or suffering from certain health implications at age 23 (the time the pension should otherwise stop)
  2. other adult children of the deceased member who had already reached age 23 when the member died but who were financially dependent or inter-dependent on the deceased member at the time the member died. This can include for example, children of the member taking on caring responsibilities in their adult years for the member parent up to the time when the member died.

Neither of these features can be made available in newer or subsequent schemes except as a result of one or more ‘relevant block transfer(s)’ (described below) that effectively continue such rights.

1. Young adult children, with transitional protection

Article 34 Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

This provision allows a pension to continue if the child either:

  • is still in full-time education or undertaking vocational training and either (i) the member died before 6 April 2006 with child’s pension in payment or due to be paid before this date or (ii) the member’s pension was in payment on 5 April 2006 and the child was born before 5 April 2007, or
  • on reaching the age of 23 or ceasing full-time education/vocational training, suffers from a physical or mental deterioration that was either serious enough to prevent them from following a normal employment, or which would seriously impair their earning capacity, and
  • on 5 April 2006, the rules of the pension scheme allowed a pension to be paid to a child of the member following the member’s death, until a time no later than when the child eventually ceased full-time education or vocational training.

2. Financially-dependent adult children

Article 34A Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

A pension may be paid to an adult child dependant of a deceased scheme member if both of the following conditions are satisfied:

The first condition is that one of the following applies:

  • (2A) the member’s pension was in payment before 2nd July 2008,
  • (2B) the child’s pension (death benefit) was in payment on 1st July 2008,
  • (2C) the child’s entitlement to the pension death benefit arose before 1st July 2008 (on or after the member’s death), or
  • (2D) the entitlement to the pension death benefit was subject to the discretion of the trustees of the scheme, and the discretion was capable of being exercised following the member’s death (in favour of the child) so that the entitlement could have arisen before 1st July 2008.

The second condition is that on 5 April 2006, the rules of the pension scheme allowed a pension to be paid to a child of the member (following the member’s death) if, at the date of the member’s death, the child was financially dependent on the member (or their financial relationship was one of mutual dependence).

3. Continuing rights after relevant block transfers

Article 34B Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

Any of the above transitional rights to have a dependant child’s pension paid after reaching 23 years of age are in the first instance rights that are specific to the schemes in which they originate.

However, pension benefit rights may sometimes transfer to another scheme. Depending on the circumstances, this can be either as a transfer of the member’s rights before their death, or as a transfer of the dependant’s entitlement that arose on or after the death of the member. In either case, the transitional protections described above will not apply in the receiving scheme unless certain conditions are met.

In the case of 1 above (“Young adult children, with transitional protection”), the first requirement for this kind of protection is that the conditions outlined under 1 above were either satisfied in the original scheme, or would have applied in the original scheme were it not for the transfer. The transfer must also have been of the kind described below, and must have taken place on or after 6 April 2006.

In the case of 2 above (“Financially-dependent adult children”), the first requirement is that the conditions outlined under 2 above were either satisfied in the original scheme, or would have applied in the original scheme were it not for the transfer. The transfer must have been of the kind described below, and must have taken place after the ‘relevant date’.

The relevant date is - in the case of 2A above - the later of 6 April 2006, and the date the member’s pension came into payment or - in the cases of 2B, 2C and 2D - the later of 6 April 2006, and the date of the member’s death (member here meaning the person who was the parent of the dependant in question).

In both cases - the second requirement for this kind of protection to apply is that the receiving scheme meets the single condition for being a ‘qualifying transferee scheme’. That single condition is that transfer must qualify as a ‘relevant block transfer’ under these regulations.

A block transfer is defined on page PTM062240. Broadly, it is a transfer where the member’s rights are included in a single transfer with the rights of at least one other member and subject to the time limits on membership set out on that page.

In addition, to be a ‘relevant block transfer’ both of the following further conditions must also be met:

  1. The transfer value being received must have come either:
* directly from the original pension scheme where the above protected rights originate, or
* indirectly from the original pension scheme where the protected rights originate, having passed through one or more intermediate schemes before reaching the latest one, having enjoyed this same protection along the way, thanks to the earlier application of this or the preceding bullet, as appropriate, together with having met the following conditions along every part of the journey, including in the final receiving scheme.
  1. Following the transfer, the receiving scheme (which would include each intermediate scheme in a series of sequential transfers) must satisfy one of the following requirements:
* it provides the child with an entitlement to the payment of pension (i.e. makes them a pensioner member), or
* in the event that it was the parent who transferred into the receiving scheme before their death, that parent must have been admitted as a member of the receiving scheme, or
* in the event that it was the parent who transferred into the receiving scheme before their death, and that parent made an irrevocable election designating part of the sums or assets representing their rights for the payment of a pension to the child, the child is then entitled to such payment from the receiving pension scheme following their parent’s death.