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HMRC internal manual

Pensions Tax Manual

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HM Revenue & Customs
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Death benefits: lump sums: uncrystallised funds lump sum death benefit

Glossary PTM000001
   

 

Definition of an uncrystallised funds lump sum death benefit
When an uncrystallised funds lump sum death benefit can be paid
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

This type of lump sum can only be paid from an other money purchase arrangement or a cash balance arrangement. It is paid from funds that have not yet been put in to payment.

That is, the funds have not been applied for the purchase of a scheme pension, a lifetime annuity, a beneficiary’s annuity or designated for drawdown pension.

The lump sum cannot be an uncrystallised funds lump sum death benefit if it satisfies the description of a charity lump sum death benefit (see PTM073900).

For more information on types of arrangement see PTM023000.

When an uncrystallised funds lump sum death benefit can be paid

Paragraph 15 Schedule 29 Finance Act 2004

The lump sum death benefit can be paid following the death of a scheme member with uncrystallised funds.  Where the member died on or after 6 April 2011, it can be paid regardless of the member’s age at death.

If the payment was before 6 April 2015 and in respect of a member who died before their 75th birthday, to qualify as an uncrystallised funds 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 the payment was made before 6 April 2015 in respect of a member who died before reaching age 75 and was outside this two-year period, it was not an uncrystallised funds 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, there is no time limit for paying the lump sum.

Payments made on or after 6 April 2015 where the member is under 75 at their death do not have to be made within the two year period to be authorised as uncrystallised funds lump sum death benefits, but see Taxation of an uncrystallised funds lump sum death benefit.

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 amount of uncrystallised funds lump sum death benefit paid must be no more than the uncrystallised funds held in the arrangement when the member died but valued 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 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

Paragraph 2 Schedule 32 Finance Act 2004

An uncrystallised funds lump sum death benefit may be tested against the member’s available lifetime allowance. It depends on how old the member was when they died and when the lump sum is paid.

If the member was aged under 75 when they died, and the uncrystallised funds lump sum death benefit is paid within 2 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 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. If the excess is taken 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 under 75 when they died, and the uncrystallised funds lump sum death benefit is paid more than 2 years from 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 uncrystallised funds lump sum death benefit is not tested against the lifetime allowance.

If the member was aged 75 or over when they died the uncrystallised funds lump sum death benefit is not tested against the lifetime allowance.  There will have been a BCE 5B when the member was 75.

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Taxation of an uncrystallised funds lump sum death benefit

Section 206 Finance Act 2004

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

Death benefits paid before 6 April 2016

If the member was under 75 when they died then, unless the lifetime allowance charge is payable, this lump sum will be tax-free, as long as it is paid within 2 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).

If the member was aged under 75 when they died, and for payments on or after 6 April 2015 the uncrystallised funds lump sum death benefit is paid more than 2 years from 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 uncrystallised funds lump sum death benefit is taxed at the special lump sum death benefit tax charge rate of 45 per cent (55 per cent if the lump sum was paid before 6 April 2015).

If the member was aged 75 or more when they died, the uncrystallised funds lump sum death benefit is taxed at 45 per cent (55 per cent if the lump sum was paid before 6 April 2015). The scheme administrator is responsible for paying this tax charge and will invariably deduct the tax due before paying the lump sum.

The scheme administrator should pay the tax charge due using the Accounting for Tax (AFT) return procedure. For guidance on when and how to file the Accounting for Tax return see PTM162000.

Death benefits paid on or after 6 April 2016

If the member was under 75 when they died then unless the lifetime allowance charge is payable, this lump sum will be tax-free, as long as it is paid within 2 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).

If the member was aged 75 or more when they died, or if they were under 75 but the lump sum was not paid within the 2 year period, the uncrystallised funds lump sum death benefit is taxable.

Whether a taxable uncrystallised funds lump sum death benefit is subject to income tax as pension income or whether the special lump sum death benefits charge arises on the scheme administrator depends on who receives it.  See ‘Tax on authorised lump sum death benefits’ page PTM073010.