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HMRC internal manual

Pensions Tax Manual

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Death benefits: types of pension: dependants' scheme pension: limit where member died on or after reaching age 75

Glossary PTM000001
   

 

When there is a limit on the level of dependants’ scheme pension payable
The dependants’ scheme pension limit
The initial member pension limit
The current member pension limit
The permitted margin
Excepted circumstances before 6 April 2016 
Scheme pension was in payment to a member or dependant on 5 April 2006

When there is a limit on the level of dependants’ scheme pension payable

Paragraphs 16A to 16C Schedule 28 Finance Act 2004

Paragraph 28 Schedule 10 Finance Act 2005

Article 24 The Taxation of Pensions (Transitional Provision) Order 2006 - SI 2006/572

Where the member dies after reaching age 75, there may be a limit on the amount of dependants’ scheme pension that can be authorised under a registered pension scheme.

The limit applies only where the scheme member:

* died after 5 April 2006,
* had reached the age of 75 before their death,
* at the time of their death was actually receiving one or more scheme pensions under the scheme, or was prospectively entitled to receive them,
* did not fall within certain exclusions, and
* the excepted circumstances (see below) do not apply.

The references to a member’s scheme pension above:

* do not include a pension where the member’s actual entitlement to payment arose before 6 April 2006 even if it was paid as a scheme pension after that date,
* do include pension where a prospective pension entitlement was in place before 6 April 2006 but the actual entitlement to payment of the scheme pension did not arise until after 5 April 2006 (see [PTM088200](https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm088200) for more on entitlement).

Exclusions

From 6 April 2016, the limit to the level of authorised dependants’ scheme pension does not apply if:

  • the member had enhanced protection at the time they died (see PTM092400), or
  • the only tests against the member’s lifetime allowance in respect of the particular pension scheme were on unused funds in money purchase arrangements when they reached age 75 (benefit crystallisation event 5B – see PTM088650).

Additionally, the dependants’ scheme pension limit does not apply for each 12-month period ending on or after 6 April 2016 while the total annual amount payable from the scheme as dependants’ scheme pension in respect of the member remains less than either the general limit or (if higher) the personal limit, or the excepted circumstances apply.

The 12-month periods

The dependants’ scheme pension limits are tested over a period of 12 months. It is these same periods for which the initial general limit and personal limit exclusions are considered, although the general and personal limits are set for particular tax years.

The initial period to consider is the 12 months beginning with the member’s death (the post-death year).  Then, starting with the end of the post-death year, consider each successive 12 month period during which dependants’ scheme pensions are paid.

The 12-month period is likely to fall across two tax years.  The general limit or personal limit must be met at all times during the 12-month period, otherwise the dependants’ scheme pension limit (see below The dependants’ scheme pension limit) will need to be applied to determine whether there is any element of unauthorised payment.

Example

Mahmood died on 6 June 2016 aged 75, while receiving a scheme pension.  He does not have enhanced protection and had had a BCE2 and a BCE6 in 2006.

The post-death year runs from 6 June 2016 to 5 June 2017.

Part of the year falls in tax year 2016-17 and part in 2017-18.

The scheme administrator will need to check whether the total annual rates of any dependants’ scheme pensions paid in respect of Mahmood during the post-death year exceed the general limit (and if so, the personal limit) for 2016-17 and 2017-18.  If the total does exceed both limits calculated for both tax years at any time in the post-death year, then unless the excepted circumstances apply, the scheme will need to do the calculations set out under The dependants’ scheme pension limit below to work out whether there is any excess that would be an unauthorised payment.

General limit

The general limit for 2016-17 is £25,000.

For each subsequent tax year the general limit is:

  • the previous tax year’s general limit,
  • increased by the highest of 5 per cent or the percentage increase in either CPI or RPI between September in the previous tax year and the September prior to that,
  • the resulting figure is rounded up to the next £100, unless it is already a multiple of £100.

Personal limit

The personal limit relates to the annual rate of all of the member’s scheme pensions in the particular scheme. In respect of the member’s entitlements in the scheme, add together:

  • the annual rate of scheme pensions to which the member was actually entitled immediately before their death (ignoring any abatement under a public service scheme), and
  • for scheme pensions to which the member was prospectively entitled, the annual rate that would have been payable immediately before the death if the member had been actually entitled to them at that time.

The total is the personal limit for the tax year in which the member dies.

For each subsequent tax year the personal limit is:

  • the previous tax year’s personal limit,
  • increased by the highest of 5 per cent or the percentage increase in either CPI or RPI between September in the previous tax year and the September prior to that,
  • the resulting figure is rounded up to the next £100, unless it is already a multiple of £100.

Excepted circumstances

The dependants’ scheme pension limit (heading immediately below this paragraph) does not apply for any period of 12 months ending on or after 6 April 2016, except the post-death year, for larger schemes when

  • a dependants’ scheme pension is increased,
  • there are at least 50 pensioner members of the pension scheme at the start of the 12-month period,
  • the dependant is one of a group of at least 20 pensioner members of the scheme, and
  • any increases to the dependants’ scheme pensions in that period are at the same rate for all the pensioner members of that group.

(The excepted circumstances conditions applying for 12 month periods which ended before 6 April 2016 were slightly different – see Excepted circumstances before 6 April 2016 (below)).

The dependants’ scheme pension limit

Where the circumstances described in the first paragraph on this page apply but the exclusion requirements are not met and both the general and personal limits are exceeded, there is a limit on the amount of dependants’ scheme pension that can be paid as authorised member payments in respect of a member’s arrangement (subject to excepted circumstances).

The limit applies both for the year immediately following the member’s death (the post-death year) and also for subsequent years. The limit allows for certain increases in the pension (for example, cost of living increases may be given).

In essence, the aggregate dependants’ scheme pension payable to all dependants of that member from a registered pension scheme must not exceed the amount of the member’s scheme pension at the date of death of the member, with certain adjustments.

If in any period the level of dependants’ scheme pension exceeds the limit, the excess is not a dependants’ scheme pension for the purpose of the pension death benefit rules but is an unauthorised member payment (see PTM130000 for more detail).

Where there is more than one dependant for whom a dependants’ scheme pension is to be provided in respect of the member’s scheme pension, and/or more than one dependants’ scheme pension is to be paid to one dependant of a member in respect of that member’s scheme pension then the pension limit is apportioned between the dependant(s) and/or dependants’ scheme pension entitlements. How this is achieved is explained in the sections below on the initial and current member pension limit. If the dependants’ scheme pension payable to a dependant exceeds the apportioned limit, only the excess will be treated as an unauthorised member payment (see PTM130000 for details about unauthorised payments).

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The initial member pension limit

Paragraph 16B Schedule 28 Finance Act 2004

Where the member dies after reaching the age of 75, the aggregate of the dependants’ scheme pensions payable to all dependants of that member from a registered pension scheme in the year after the member’s death (the post-death year) must not exceed the initial member pension limit.

The initial member pension limit is the sum of the following aggregate amounts:

either:

* if the member lived for more than 12 months after starting to receive a scheme pension, the aggregate of the scheme pension(s) that were paid to the member from the registered pension scheme (or by an insurance company) in the 12-month period immediately preceding the date of death (‘the pre-death year’), or
* if the member died within 12 months of starting to receive a scheme pension, the amount of pension that would have been paid to the member in the 12 months from the date the member first became entitled to the pension, had the member not died

plus

* the amount of scheme pension that would have been paid in that period if the member had drawn the scheme pension(s) to which he or she had a prospective entitlement under the registered pension scheme or associated contract with an insurance company,

plus

* where a tax-free lump sum had been paid in connection with the member’s scheme pension, 5 per cent of the amount of the lump sum paid.  For 12 month periods ending on or after 6 April 2016, uprate this amount by the higher of the percentage increase in CPI or RPI (where the higher of the percentage increases in CPI and RPI are more than zero) from the month the entitlement to the lump sum arose to the month in which the member died.

The initial member pension limit is apportioned between the dependant(s) and/or dependants’ scheme pension entitlements where there is:

* more than one dependant for whom a dependants’ scheme pension is to be provided in respect of the member’s scheme pension, and/or
* more than one dependants’ scheme pension is to be paid to one dependant of a member in respect of that member’s scheme pension.

The initial member pension limit is apportioned by reference to the amount of a dependants’ scheme pension payable in a 12-month period as a proportion of the total amount of dependants’ scheme pensions payable in that 12-month period. This is calculated using the formula:

P / AP

Where

P is the amount of the particular dependants’ scheme pension payable in the post-death year, and

AP is the total of the amounts of each of the scheme pensions payable under the pension scheme to dependants of the member in the post-death year.

If the dependants’ scheme pension payable to a dependant exceeds the apportioned limit, only the excess will be treated as an unauthorised member payment (see PTM130000 for more detail).

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The current member pension limit

Paragraph 16C Schedule 28 Finance Act 2004

Where the circumstances described above are met, the amount by which a dependants’ scheme pension may be increased after the post-death year is also limited.

This further limit applies from the end of the post-death year; that is, it applies for the 12-month period that starts 12 months after the member’s death, and for each following 12-month period.

The rule provides that if in any of these 12-month periods, other than in excepted circumstances, the amount of dependants’ scheme pension payable exceeds the ‘current member pension limit’ then the excess is not treated as a dependants’ scheme pension but is an unauthorised member payment.

The current member pension limit is:

* the ‘initial member pension limit’ plus
* the ‘permitted margin’ and
* for 12 month periods ending before 6 April 2016 the ‘excepted circumstances amount’ (see below; [Excepted circumstances before 6 April 2016](#IDAWJHLD)).

The pension limit is apportioned between the dependant(s) and/or dependants’ scheme pension entitlements where:

* there is more than one dependant for whom a dependants’ scheme pension is to be provided in respect of the member’s scheme pension, and/or
* more than one dependants’ scheme pension is to be paid to one dependant of a member in respect of that member’s scheme pension.

The limit is apportioned by reference to the amount of each dependants’ scheme pension payable in a 12-month period as a proportion of the total amount of dependants’ scheme pensions payable in that 12-month period. This is calculated using the formula:

P / AP

Where-

P is the amount of the particular dependants’ scheme pension payable in the 12 months in question

AP is the total of the amounts of each of the dependants’ scheme pensions payable under the pension scheme to dependants of the member in the 12 months in question.

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The permitted margin

The permitted margin is the amount of the initial member pension limit (see The initial member pension limit) increased by the greater of two amounts found by carrying out calculation A and calculation B below.

Calculation A

Increase the initial member pension limit by the relevant annual percentage for the period beginning with the first month beginning after the member’s death and ending with the first month ending after the start of the 12-month period in question.

The relevant annual percentage is either:

  • the annual rate agreed in respect of the member’s scheme pension (that is, if a relevant valuation factor of greater than 20 had been agreed in respect of that pension - see PTM088620) or
  • 5 per cent per annum.

Calculation B

Increase the initial member pension limit by the percentage increase in RPI from the month in which the member died to the first month of the 12-month period in question. But if RPI has remained level or has decreased over this period, then no increase is permitted under calculation B for this period.

This means that increases in the dependants’ scheme pension are permitted on a cumulative basis, or as a one-off large increase, or as smaller annual increases.

(In respect of 12-month periods ending before 6 April 2016, the increase for both calculation A and B was calculated from the beginning of the 12-month period after the end of the post-death year (that is, the rate in the 13th month after the member’s death) to the first month of the 12-month period in question.)

Excepted circumstances before 6 April 2016

Paragraph 16C(3) to (5) Schedule 28 Finance Act 2004

There are certain excepted circumstances where, although the dependants’ scheme pension exceeds the ‘current member pension limit’, the excess is an authorised dependants’ scheme pension.  Simplified excepted circumstances apply for 12 month periods ending on or after 6 April 2016, and are explained above at When there is a limit on the level of dependants’ scheme pension payable.

For periods ending before 6 April 2016, these excepted circumstances applied only where:

* there are 50 or more pensioner members in the scheme at the start of the 12-month period in which the dependants’ scheme pension was increased, and
* the circumstances satisfy one of the tests set out below.

The tests are that:

* the dependants’ scheme pension payable by the scheme has increased by the same amount as all other dependants’ scheme pensions payable by the same scheme. For this purpose, it is necessary to compare the amount of each such pension payable in the 12-month period in which the increase in question occurs with the same pensions paid in the previous 12-month period. This test would, for example, be satisfied if all dependants scheme pensions were increased by £1,000 on the same date;
* the dependants’ scheme pension payable by the scheme has increased by the same percentage as all other dependants’ scheme pensions payable by the same scheme. This is determined by comparing the change in each such pension from the previous 12-month period to the 12-month period in which the increase takes place, as a percentage of the pension payable in that previous 12-month period. This test would be satisfied, for example, if a scheme awarded a 10 per cent increase in all dependants’ scheme pensions;
* both a percentage increase and a flat-rate increase have been applied to the dependants’ scheme pension and the total increase in the dependants’ scheme pension payable by the scheme is made up of the same percentage increase and the same amount as all dependants’ scheme pensions payable by the scheme in a 12-month period.

The excepted circumstances amount before 6 April 2016

This is the amount by which a dependants’ scheme pension has been increased in any year since the post-death year, where the excepted circumstances described above apply in respect of that increase.

The amount of the increase is the difference between the pension in the year of the increase and the pension in the previous 12-month period.

This amount, the initial member pension limit and the permitted margin are added together to calculate the current member pension limit.

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Scheme pension was in payment to a member or dependant on 5 April 2006

Article 24 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - S.I. 2006/572

The limit on a dependants’ scheme pension applies only where the member died after 5 April 2006. See When there is a limit on the level of dependants’ scheme pension payable for further details.