HMRC internal manual

Pensions Tax Manual

PTM073100 - Death benefits: lump sums: defined benefits lump sum death benefit

| Glossary | PTM000001 | |———-|————————————————————————————-|

Definition of a defined benefits lump sum death benefit
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.

The payment conditions for a defined benefits lump sum death benefit are that it is paid from a defined benefits arrangement and is not:

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

For payments made before 6 April 2016 there is an extra payment condition. Lump sums paid in respect of a member aged under 75 when they died must be paid within two years of the earlier of the following dates:

  • the date the 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.

Where the lump sum was paid before 6 April 2016 in respect of a member aged under 75 when they died and it wasn’t paid within the two year period, the payment is not a defined benefits lump sum death benefit. It is an unauthorised member payments and should be taxed as (see PTM131000).

These are the payment conditions for lump sums paid in respect of someone who died on or after 6 April 2011. For guidance relating to payments made in respect of a member who died before 6 April 2011 see RPSM10105110 on the National Archives website.

Top of page

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.

Top of page

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.

Top of page

Defined benefits lump sum death benefit and the lifetime allowance

Section 216, ‘BCE 7’ and paragraphs 2 and 16 Schedule 32 Finance Act 2004

A defined benefits lump sum death benefit will be tested against the member’s available lifetime allowance if the member was aged under 75 when they died and it is paid within two years of the earlier of:

  • 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.

The payment of the lump sum in these circumstances is a BCE 7. PTM088680 provides more information about this benefit crystallisation event.

PTM087000 provides guidance on how liability to the lifetime allowance charge arises in respect of death benefits, who is liable pay the tax charge, how much, and the processes to be used.

Payment of defined benefits lump sum death benefit:

  • outside the two year period shown above, or
  • in respect of a member aged 75 or older when they died

is not be a BCE and does not trigger a test of the benefit against the member’s lifetime allowance.

Top of page

Taxation of a defined benefits lump sum death benefit

The tax position depends on how old the member was when they died and when the lump sum was paid.

Payments made before 6 April 2016

Section 206 Finance Act 2004

Sections 636A(1)(d) and (4)(za) Income Tax (Earnings and Pensions) Act 2003

If the member was under 75 when they died the lump sum will be tax free unless the lifetime allowance charge is payable.

If the member was aged 75 or older when they died the lump sum is subject to the special lump sum death benefits charge. The rate of the tax charge was:

45 per cent for 2015-16

55 per cent 2011-12 to 2014-15

It is not possible to pay a defined benefits lump sum in respect of a member who died before 6 April 2011 aged 75 or older.

The scheme administrator is liable to pay the tax charge. They should report and pay the tax using the Accounting for Tax return process (see PTM162000).

Payments made on or after 6 April 2016

Section 206 Finance Act 2004

Sections 636A(4) and (4ZA) and 636AA(3) Income Tax (Earnings and Pensions) Act 2003

The tax treatment of the lump sum paid on or after 6 April 2016 depends on how old the member was when they died, how long it takes to pay the lump sum and who receives the payment.

If the member was under 75 when they died and the lump sum is paid within two years of:

  • the date the scheme administrator first knew of the member’s death, or
  • if earlier, the date they could first reasonably have been expected to know of it

the lump sum will be tax free unless the lifetime allowance charge is payable.

The defined benefits lump sum death benefit is taxable if:

  • the member (or dependant) was 75 or older when they died, or
  • the lump sum was not paid within the two year payment period shown above.

Whether the taxable lump sum payment is:

  • taxable as income of the recipient, or
  • subject to the special lump sum death benefits charge

depends on whether or not the lump sum is paid to a ‘non-qualifying person’. Payments to a ‘non-qualifying person’ are subject to the special lump sum death benefits charge.

Go to PTM073010 for more detailed information on the tax treatment of lump sum death benefits paid on or after 6 April 2016, including the definition of a ‘non-qualifying person’.