PTM073400 - Death benefits: lump sums: annuity protection 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 |
Paying an annuity protection lump sum death benefit
Conditions for paying an annuity protection lump sum death benefit
When and to whom an annuity protection lump sum death benefit can be paid
The maximum annuity protection lump sum death benefit payable
How an annuity protection lump sum death benefit is taxed
Paying an annuity protection lump sum death benefit
Where a member:
- starts to receive a scheme pension from a money purchase arrangement (including a cash balance arrangement), or
- purchases a lifetime annuity contract
they can choose 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 an annuity protection lump sum death benefit.
Conditions for paying an annuity protection lump sum death benefit
Paragraph 16 Schedule 29 Finance Act 2004
For a lump sum to be an annuity protection lump sum death benefit it must satisfy all the following payment conditions. The payment conditions are:
- it is paid in respect of a money purchase arrangement,
- it is paid in respect of a scheme pension or lifetime annuity to which the member was entitled at the date of the member’s death, and
- the amount of the payment is not more than the ‘annuity protection limit’ – see The maximum annuity protection lump sum death benefit payable.
If the amount of the lump sum is more than the ‘annuity protection limit’, the excess amount is not an annuity 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). The amount of the lump sum up to the annuity protection limit will be an annuity protection 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 RPSM10105160 on the National Archives.
When and to whom an annuity protection lump sum death benefit can be paid
Where the member died on or after 6 April 2011, an annuity 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.
The maximum annuity protection lump sum death benefit payable
Paragraph 16 Schedule 29 Finance Act 2004
Article 33 Taxation of Pensions (Transitional Provisions) Regulations 2006 - SI 2006/572
The ‘annuity protection limit’ is the maximum amount that can be paid as an annuity protection lump sum death benefit.
Broadly the maximum annuity protection lump sum death benefit that can be paid is the amount of the scheme pension or annuity which crystallised for lifetime allowance purposes less the amount of scheme pension or annuity which has been paid to the member. The legislation provides for the annuity protection limit to be calculated using the formula
AC - AP - TPLS
Where
AC is either:
- the amount which crystallised as either a BCE 2 or a BCE 4 as the member became entitled to their pension or annuity before reaching age 75.
- the amount that would have crystallised as either a BCE 2 or a BCE 4 but for the fact that the member became entitled to their pension or annuity on or after reaching age 75.
AP is the amount of the pension or annuity paid up to the time the member died. If the pension or annuity started before 6 April 2006 only payments made on or after 6 April 2006 are included.
TPLS is the amount of any annuity protection lump sum death benefit previously paid in respect of the pension or annuity.
Example
A lifetime annuity contract is purchased for David from uncrystallised funds at a cost of £100,000. The maximum annuity protection that can be provided under the contract is £100,000.
David dies at age 74 and has received a total of £80,000 of lifetime annuity payments from that contract. The maximum annuity protection lump sum death benefit that can be paid is £20,000. This limit is calculated as follows:
AC - AP - TPLS, or
£100,000 (AC) - £80,000 (AP) - £0 (TPLS) = £20,000.
How an annuity protection lump sum death benefit is taxed
Death benefit paid on or after 6 April 2016
Section 206 Finance Act 2004
Sections 579A, 6367K, 637R and 637S Income Tax (Earnings and Pensions) Act 2003
Paragraph 131 Schedule 9 Finance Act 2024
The Pension Benefits (Insurance Company Liable as Scheme Administrator) Regulations 2006 - SI 2006/136
If the lump sum is paid on or after 6 April 2016 its tax treatment depends on how old the member was when they died, who receives the payment, and the amount of the deceased member's lump sum and death benefit allowance remaining.
If the member was aged under 75 when they died the lump sum is not taxable unless the deceased member has insufficient lump sum and death benefit allowance remaining.
The lump sum death benefit is taxable if the member was aged 75 or older when they died. 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.
An annuity protection lump sum death benefit is a relevant lump sum and a relevant benefit crystallisation event unless it is paid from rights that previously crystallised under s216 Finance Act 2004. The payment 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.
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’.