PTM073200 - Death benefits: lump sums: uncrystallised funds lump sum death benefit
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 |
Definition of an uncrystallised funds lump sum death benefit
Who can receive an uncrystallised funds lump sum death benefit
Amount that can be paid as an uncrystallised funds lump sum death benefit
Taxation of an uncrystallised funds lump sum death benefit
Definition of an uncrystallised funds lump sum death benefit
Paragraph 15 Schedule 29 Finance Act 2004
For a lump sum to be an uncrystallised funds lump sum death benefit it must satisfy all the payment conditions. The payment conditions are:
- it is paid in respect of an other money purchase or cash balance arrangement,
- it is paid from ‘relevant uncrystallised funds’,
- it is not a charity lump sum death benefit (see PTM073900), and
- it does not exceed the ‘permitted maximum’ amount – see Amount that can be paid as an uncrystallised funds lump sum death benefit.
‘Relevant uncrystallised funds’ are funds that, at the member’s death, had not been:
- used to purchase a scheme pension, a lifetime annuity, dependants’ scheme pension dependants’ annuity or nominees’ annuity, or
- designated as available to pay drawdown pension.
If the amount of the lump sum is more than the ‘permitted maximum’, the excess amount is not an uncrystallised funds lump sum death benefit. If the excess cannot be paid as some other type of lump sum death benefit it will be an unauthorised member payment and taxed accordingly (see PTM131000). The amount of the lump sum up to the permitted maximum’ will be an uncrystallised funds lump sum death benefit.
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 RPSM10105200 on the National Archives website.
Who can receive an uncrystallised funds 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.
Amount that can be paid as an uncrystallised funds lump sum death benefit
Paragraph 15 Schedule 28 and paragraph 15(2A) and (3) Schedule 29 Finance Act 2004
The maximum amount that can be paid as an uncrystallised funds lump sum death benefit is referred to in the legislation as the ‘permitted maximum’. This is the amount of the sums and assets representing the member’s relevant uncrystallised rights held under the arrangement when the member died. The valuation is done at the point of the lump sum payment. So any growth of those uncrystallised funds between the date of the member’s death and the date the lump sum is paid may be included in the payment.
Employer top-ups to cash balance arrangements
Where a dependant of the member is entitled at the member’s death to a lump sum from a cash balance arrangement, the sums and assets held for the arrangement immediately after the death may not be enough to pay that amount. Where the employer makes a top-up contribution to the pension scheme to make up the shortfall:
- on or after 16 September 2016,
- paid by an employer in relation to the member, and
- of only as much as is needed to make good the insufficiency immediately after the death,
the contribution is treated as being part of the uncrystallised funds in the arrangement when the member died.
For this purpose, dependant has its extended meaning given by paragraph 15(2A) Finance Act 2004 to include any child of the member, including those who reach age 23 on or after 16 September 2016.
Taxation of an uncrystallised funds lump sum death benefit
Death benefits paid on or after 6 April 2016
Section 206 Finance Act 2004
Sections 579A, 637J and 637S Income Tax (Earnings and Pensions) Act 2003
The tax treatment of the lump sum 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 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 payment exceeds the deceased member's available lump sum and death benefits allowance.
The uncrystallised funds lump sum death benefit is a “relevant lump sum death benefit” and is tested against the lump sum and death benefit allowance. The amount of the lump sum that exceeds the deceased member’s available allowance will be taxed as pension income at the recipient’s marginal rate.
The uncrystallised funds 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, including the lump sum and death benefit allowance and the definition of a ‘non-qualifying person’.