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HMRC internal manual

Pensions Tax Manual

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HM Revenue & Customs
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Death benefits: types of pension: dependants' scheme pension: conditions

Glossary PTM000001
   

 

Conditions for a dependants’ scheme pension
Paying a dependants’ scheme pension
Maximum dependant’s scheme pension payable
Provision of a dependants’ scheme pension under a money purchase arrangement
A dependants’ scheme pension and the lifetime allowance
How a dependants’ scheme pension is taxed

Conditions for a dependants’ scheme pension

Paragraphs 15(2B) and 16 Schedule 28 Finance Act 2004

A dependants’ scheme pension may be provided under both a money purchase arrangement and a defined benefits arrangement. It may be paid either by the scheme administrator of the registered pension scheme providing the pension or, if the scheme’s liability to pay the pension has been secured through the purchase of an annuity contract, by the insurance company underwriting that contract.

For the avoidance of doubt, unlike a scheme pension payable to the member, a dependants’ scheme pension:

  • does not have to be paid for the life of the dependant, it may be stopped at any time in accordance with the rules of the scheme or the terms of the annuity contract,
  • does not have to be paid annually, and
  • may be reduced at any time in accordance with the rules of the scheme or the terms of the annuity contract.

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Paying a dependants’ scheme pension

The pension tax rules do not require a dependants’ scheme pension to come into payment immediately following the death of the member. The commencement of payment of the pension can be deferred until a later date, for example because there are continuing guaranteed pension payments, or because the dependant is still young. Whether or not a dependant’s pension entitlement can be deferred in this way, and for how long, depends on what is allowed by the rules of the pension scheme or the terms of the annuity contract under which the pension is paid.

Where the member has more than one dependant when they die, each of them may be provided with a dependants’ scheme pension by the scheme or separate annuity contracts. The pensions do not have to come into payment at the same time.

Unlike a member’s scheme pension, a dependants’ scheme pension cannot:

  • be guaranteed for a term certain
  • be given pension protection
  • give rise to the right to a tax-free lump sum, or
  • give rise to any further benefit on the death of the dependant.

The extended meaning of ‘dependant’ for a child of the member who reaches age 23 on or after 16 September 2016 does not apply in respect of dependants’ scheme pensions.  So, if the child is not a dependant because of physical or mental impairment, the pension must cease by age 23.

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Maximum dependant’s scheme pension payable

There is no limit on the amount of pension that can be paid as a dependant’s scheme pension if the member died before reaching age 75. However, the amount of pension payable is subject to certain limits where it comes into payment following the death of a member age 75 or over - see PTM072120.

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Provision of a dependants’ scheme pension under a money purchase arrangement

Section 167 Finance Act 2004

A dependants’ scheme pension can be provided from a money purchase arrangement as well as from a defined benefits arrangement in the same way as a member’s scheme pension. The same principles and considerations outlined in PTM062300 apply to a dependants’ scheme pension. These include that:

  • the member or dependant must have been given the option of choosing a dependants’ annuity instead of a dependants’ scheme pension,
  • a dependants’ annuity differs from a dependants’ scheme pension secured with an insurance company (see PTM072200), and
  • a dependants’ scheme pension can be provided from the application of dependants’ drawdown pension fund (see PTM072300) or dependants’ flexi-access drawdown fund (see PTM072400).

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A dependants’ scheme pension and the lifetime allowance

The arising entitlement to a dependants’ scheme pension is not a benefit crystallisation event so does not trigger a lifetime allowance test. Nor does it use up any of either the deceased member’s or the dependant’s lifetime allowance.

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How a dependants’ scheme pension is taxed

Sections 579A to 579C Income Tax (Earnings and Pensions) Act 2003

The person receiving the dependants’ scheme pension is liable for income tax on the amount they receive, as pension income. The payer of the pension will deduct tax in accordance with the PAYE regulations. The taxable pension income for a tax year is the full amount of the scheme pension under the registered pension scheme that accrues in that year, irrespective of when any amount is actually paid.