HMRC internal manual

Pensions Tax Manual

Death benefits: lump sums: uncrystallised funds lump sum death benefit

Glossary PTM000001
   

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
Uncrystallised funds lump sum death benefit and the lifetime allowance
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:

‘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.

For payments made before 6 April 2015 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.

For such lump sums, if they are not paid within this two year period, they cannot be an uncrystallised funds lump sum death benefit.  In these circumstances the payment will be an unauthorised payment and should be taxed as such (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 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.

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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.

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Uncrystallised funds lump sum death benefit and the lifetime allowance

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

An uncrystallised funds 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 an uncrystallised funds 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.

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Taxation of an uncrystallised funds lump sum death benefit

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

Death benefits paid before 6 April 2015

Section 206 Finance Act 2004

Sections 636A(1)(e) and (4)(aa) Income Tax (Earnings and Pensions) Act 2003

The tax treatment of the lump sum depends on how old the member was when they died.

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 55 per cent (35 per cent for payments made before 6 April 2011).  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).

Death benefit paid between 6 April 2015 and 5 April 2016

Section 206 Finance Act 2004

Section 636A(4)(aa) Income Tax (Earnings and Pensions) Act 2003

The tax treatment of the lump sum depends on how old the member was when they died and if the lump sum was paid within the two year payment window.

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 lifetime allowance charge is payable.

The requirement for the lump sum to be paid within this two year period for the lump sum to be tax free does not apply to payments made before 6 April 2015.  This is because before 6 April 2015 a lump sum paid outside the two year period cannot be an uncrystallised funds lump sum death benefit – see Definition of an uncrystallised funds lump sum death benefit above.

Payment of an uncrystallised funds lump sum death benefit after 5 April 2015 but before 6 April 2016:

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

is subject to the special lump sum death benefits charge.  The rate of the tax charge for this period was 45 per cent.  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).

Death benefits paid 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 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 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 paid on or after 6 April 2016, including the definition of a ‘non-qualifying person’.