PTM071500 - Death benefits: essential principles: payment of pension after a member’s death using a pension guarantee
As of 6 April 2024 there is no longer lifetime allowance. If you are looking for information about protections, enhancement factors and the lifetime allowance charge please see these pages on The National Archives.
If you are looking for information about the principles of lifetime allowance and benefit crystallisation events please see these pages of The National Archives.
Glossary |
Section 165(1) Pension rule 2 Finance Act 2004
A scheme pension or annuity can be paid to a member for a guaranteed minimum period (a ‘term certain’). This means that the scheme or insurance company guarantees to continue paying the pension or annuity entitlement for the given term. If the member dies before the end of the guarantee period, the pension can continue to be paid to another person.
Payments of a pension guarantee can be made to any individual, not just a dependant or nominee. Payment of a pension guarantee can also be split and paid to more than one person. If the scheme rules provide for this, the guaranteed pension payment may be assigned by Will, or by the member’s personal representative in the distribution of the deceased member’s estate.
The maximum length of the pensions guarantee depends on the form of pension or annuity and when entitlement to the annuity arose.
A scheme pension can be guaranteed to make payments for up to 10 years from the date the member became entitled to the scheme pension.
By their nature, the maximum term for a short-term annuity is five years.
A lifetime annuity to which the member became entitled before 6 April 2015 can be guaranteed to make payments for up to 10 years from the date the member became entitled to it.
A lifetime annuity to which the member became entitled on or after 6 April 2015 may be guaranteed for a ‘term certain’ of any length of time.
Paragraphs 2(6) and 3(2) Schedule 28 Finance Act 2004
A pension paid under guarantee to a scheme pension or lifetime annuity may stop before the end of the ‘term certain’ if after the member’s death the recipient of the pension guarantee:
- marries,
- enters into a civil partnership,
- reaches the age of 18, or
- ceases to be in full-time education.
From 6 April 2015 it may be possible for the pension guarantee to be commuted and paid as a trivial commutation lump sum death benefit. PTM073700 explains what conditions need to be satisfied for a pension guarantee to be commuted into a trivial commutation lump sum death benefit.
Taxation of a pension guarantee
Sections 579A, 579D and section 646B(4) Income Tax (Earnings and Pensions) Act 2003
In most cases a pension guarantee is taxable as pension income. Each recipient of a pension guarantee is liable to pay tax on the full amount of pension they accrue in the tax year, regardless of the amount actually paid. The pension payer should operate PAYE on the pension paid under a guarantee.
However, an annuity paid under pension guarantee provided under a lifetime annuity contract on or after 6 April 2015 may be tax free if:
- The annuity payment is a continuation of a lifetime annuity that had already started to be paid to the member,
- The member died on or after 3 December 2014 aged under 75, and
- The only payments made under the lifetime annuity contract before 6 April 2015 were payments of lifetime annuity to the member, and not payments under the pension guarantee.