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HMRC internal manual

Pensions Tax Manual

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Death benefits: lump sums: defined benefits lump sum death benefit

Glossary PTM000001
   

 

Definition of a defined benefits lump sum death benefit
When a defined benefits lump sum death benefit can be paid
Who can receive a defined benefits lump sum death benefit
Amount that can be paid as a defined benefits lump sum death benefit
Defined benefits lump sum death benefit and the lifetime allowance
Taxation of a defined benefits lump sum death benefit

Definition of a defined benefits lump sum death benefit

Paragraph 13 Schedule 29 Finance Act 2004

Broadly, a defined benefits lump sum death benefit is a lump sum that is paid from a defined benefits arrangement following the death of a member. A common example of this type of lump sum is where a member dies whilst still in employment and their pension scheme pays out a lump sum of a multiple of their salary following their death, e.g. 4 times salary.

However, a lump sum cannot be a defined benefits lump sum death benefit if it meets the payment conditions for any of the following types of lump sum:

  • a pension protection lump sum death benefit
  • a trivial commutation lump sum death benefit, or
  • a winding-up lump sum death benefit.

When a defined benefits lump sum death benefit can be paid

Paragraph 13 Schedule 29 Finance Act 2004

Where the member died on or after 6 April 2011, the defined benefits lump sum death benefit can be paid regardless of the member’s age at death.

If the payment was before 6 April 2016 and in respect of a member who died before their 75th birthday, to qualify as a defined benefits lump sum death benefit it must have been paid within two years of the earlier of the following dates:

  • the date the pension scheme administrator first knew of the member’s death, or
  • the date the scheme administrator could reasonably have been expected to know of the member’s death.

If it was paid before 6 April 2016 in respect of a member who died before reaching age 75 and was outside this two-year period, it was not a defined benefits lump sum death benefit but an unauthorised member payment and taxed accordingly. See PTM131000.

Regardless of the date of payment, if the member was 75 or over when they died, this two-year time limit for paying the lump sum does not apply.

Payments made on or after 6 April 2016 where the member is under 75 at their death do not have to be made within the two year period to be authorised as defined benefits lump sum death benefits, but see Taxation of a defined benefits lump sum death benefit below.

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Who can receive a defined benefits lump sum death benefit

The tax rules do not set any conditions on who can be paid this type of lump sum. However the rules of the pension scheme may set limits on who it will pay this type of benefit to.

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Amount that can be paid as a defined benefits lump sum death benefit

The tax rules do not set a limit on how much can be paid as a defined benefits lump sum death benefit. However the rules of the pension scheme may set a limit on how much it will pay out.

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Defined benefits lump sum death benefit and the lifetime allowance

Paragraph 2 Schedule 32 Finance Act 2004

The defined benefits lump sum death benefit may be tested against the deceased member’s available lifetime allowance.

It depends on how old the member was when they died and whether payment is made within the two year period.

If the member was aged under 75 when they died, and payment is made within the two year period, the amount of the lump sum payment is tested against the lifetime allowance. If the total benefits taken in respect of the member are more than their lifetime allowance, the excess is liable to the lifetime allowance charge. Where the excess is paid as a lump sum, the tax rate of the lifetime allowance charge is 55 per cent. More information on the lifetime allowance test for death benefits can be found at PTM088600.

If the member was aged 75 or over when they died, or payment is not within the two year period, the defined benefits lump sum death benefit is not tested against the lifetime allowance. There will have been a BCE 5 when the member reached the age of 75.

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Taxation of a defined benefits lump sum death benefit

Section 206 Finance Act 2004

Sections 579A, 636A and 636AA Income Tax (Earnings and Pensions) Act 2003

The tax position on payment of a defined benefits lump sum death benefit depends on how old the member was when they died.

If the member was under 75 when they died, and for payments on or after 6 April 2016 the payment is made within the two year period, the defined benefits lump sum death benefit is payable tax-free, unless the lifetime allowance charge is payable.

The defined benefits lump sum death benefit is taxable if:

  • the member was aged 75 or more, or
  • for payments on or after 6 April 2016 the member was under 75 at death but the payment is not within the two year period.

 

Whether a taxable defined benefits lump sum death benefit is subject to income tax as pension income of the recipient or to the special lump sum death benefits charge on the scheme administrator depends on the date of the payment and who receives it.

  • Taxable payments before 6 April 2016 were subject to the special lump sum death benefits charge of 45 per cent (55 per cent before 6 April 2015).  The scheme administrator is responsible for notifying and paying the tax charge using the Accounting for Tax (AFT) return procedure, see PTM162000.
  • For taxable payments made on or after 6 April 2016 see ‘Tax on authorised lump sum death benefits’ page PTM073010.

 

Where the lump sum was paid before 6 April 2016, the member was under the age of 75 at death and the payment was not made within the two year period, the payment is not a defined benefits lump sum death benefit but an unauthorised payment subject to tax charges (see PTM131000).