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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: pension protection lump sum death benefit

Glossary PTM000001
   

 

Paying a pension protection lump sum death benefit
Conditions for paying a pension protection lump sum death benefit
When and to whom a pension protection lump sum death benefit can be paid
The maximum pension protection lump sum death benefit payable
A pension protection lump sum death benefit and the lifetime allowance
How a pension protection lump sum death benefit is taxed

Paying a pension protection lump sum death benefit

Where the member was getting a scheme pension from a defined benefits arrangement, at the time the pension started the member may have chosen to guarantee that a set amount of pension will be provided. If the member dies before the guaranteed amount of pension has been paid, the balance can be paid as a pension protection lump sum death benefit.

Conditions for paying a pension protection lump sum death benefit

Paragraph 14 Schedule 29 Finance Act 2004

A lump sum is a pension protection lump sum death benefit if:

  • it is paid in respect of a defined benefits arrangement,
  • it is paid in respect of a scheme pension to which the member was entitled at the date of the member’s death, and
  • the member has specified that it is to be treated as a pension protection lump sum death benefit rather than a defined benefits lump sum death benefit (see PTM073100 for more detail about a defined benefits lump sum death benefit).

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When and to whom a pension protection lump sum death benefit can be paid

Where the member died on or after 6 April 2011, a pension protection lump sum death benefit can be paid whatever age the member was when they died. The pensions tax rules do not set any conditions on who can be paid this type of lump sum or any time limit for its payment. However the member’s pension scheme may have their own rules in respect of this payment.

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The maximum pension protection lump sum death benefit payable

Paragraph 14 Schedule 29 Finance Act 2004

Article 33 Taxation of Pensions (Transitional Provisions) Regulations 2006 - SI 2006/572

If a lump sum meets the conditions for a pension protection lump sum death benefit but the amount of the lump sum exceeds the “pension protection limit”, then the excess is not a pension protection 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 or more detail on unauthorised payments.

Broadly the maximum pension protection lump sum death benefit that can be paid is the crystallised amount of the scheme pension for lifetime allowance purposes less the amount of scheme pension paid to the member. The “pension protection limit” is calculated using the formula

AC - AP - TPLS

Where

 
AC is either

* the amount which crystallised as a BCE 2 (see [PTM088100](https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm088100)) as the member became entitled to their pension before reaching age 75, or
* the amount that would have crystallised as a BCE 2 but for the fact that the member became entitled to their scheme pension on or after reaching age 75.

AP is the amount of the scheme pension paid up to the time the member died. If the scheme pension started before 6 April 2006 only those pension payments made on or after 6 April 2006 are included.

TPLS is the amount of any pension protection lump sum death benefit previously paid in relation to the member’s scheme pension entitlement either under the scheme or by any insurance company with which that entitlement had been secured.

Example

John becomes entitled to a scheme pension of £10,000 per annum under a defined benefits arrangement. John’s scheme administrator secures half the scheme pension liability by purchasing an annuity with pension protection from an insurance company. John specifies that any lump sum death benefit will be paid as a pension protection lump sum death benefit as opposed to a defined benefits lump sum death benefit.

For lifetime allowance purposes the amount crystallised (AC) is £200,000. So £200,000 is the maximum pension protection that can be provided under the scheme (or through any annuity contract secured by the scheme administrator).

John dies aged 74 having received total scheme pension payments (AP) of £100,000. The maximum pension protection lump sum death benefit that can be paid on his death is £100,000. This limit is calculated as follows:

* AC - AP - TPLS, or
* £200,000 (AC) - £100,000 (AP) - £0 (TPLS) = £100,000.

But if £50,000 was paid as a pension protection lump sum death benefit by the insurance company (in relation to the annuity contract securing part of the scheme pension entitlement), a further £50,000 could be paid direct from the scheme under the arrangement the pension entitlement arose from. The limit is calculated as follows:

* AC - AP - TPLS, or
* £200,000 (AC) - £100,000 (AP) - £50,000 (TPLS) = £50,000.

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A pension protection lump sum death benefit and the lifetime allowance

A pension protection lump sum death benefit is not a benefit crystallisation event so its payment does not trigger a lifetime allowance test nor does it use up any of either the deceased member’s or the recipient’s lifetime allowance.

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How a pension protection lump sum death benefit is taxed

Section 206 Finance Act 2004

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

The Pension Benefits (Insurance Company Liable as Scheme Administrator) Regulations 2006 - SI 2006/136

Death benefit paid before 6 April 2015

If the lump sum was paid before 6 April 2015, the special lump sum death benefits charge was due on the payment. The rate of the tax charge was 55 per cent and this was the liability of the scheme administrator.

Death benefit paid between 6 April 2015 and 5 April 2016

If the lump sum is paid on or after 6 April 2015 (including where the member died before that date) but before 6 April 2016, its tax treatment depends on how old the member was when they died:

  • the member was under age 75 when they died: the lump sum is payable tax free
  • the member was aged 75 or over when they died: the special lump sum death benefits charge at the rate of 45 per cent was due on the payment and this was the liability of the scheme administrator.

Death benefit paid on or after 6 April 2016

Where the member was under age 75 when they died, the lump sum is payable tax free.  Where the member was aged 75 or over when they died, the lump sum is taxable.

Whether the taxable pension protection 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 who receives it.  See ‘Tax on authorised lump sum death benefits’ page PTM073010.