Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Pensions Tax Manual

From
HM Revenue & Customs
Updated
, see all updates

Death benefits: lump sums: annuity protection lump sum death benefit

Glossary PTM000001
   

 

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
An annuity protection lump sum death benefit and the lifetime allowance
How an annuity protection lump sum death benefit is taxed

Paying an annuity protection lump sum death benefit

Where the member was being paid a pension as either a lifetime annuity or a scheme pension from a money purchase arrangement (including a cash balance arrangement), when their scheme pension started or the lifetime annuity contract was purchased the member may have chosen to guarantee that a set amount of pension would 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

A lump sum is an annuity protection lump sum death benefit if:

  • it is paid in respect of a money purchase arrangement, and
  • 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.

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.

Top of page

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

There is a maximum annuity protection lump sum death benefit that can be paid. If a lump sum meets the conditions for a pension protection lump sum death benefit but the amount of the lump sum exceeds the “annuity 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 authorised lump sum death benefit it will be an unauthorised member payment and taxed accordingly - see PTM131000.

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 (see [PTM088100](https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm088100)) 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. For lifetime allowance purposes the amount that crystallises here through benefit crystallisation event (BCE) 4 is £100,000 (the purchase cost). So 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.

Top of page

An annuity 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.

Top of page

How an annuity 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 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 was the liability of the scheme administrator.

Death benefit between 6 April 2015 and 5 April 2016

If the lump sum was paid on or after 6 April 2015 (including where the member died before that date) but before 6 April 2016, its tax treatment depended 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 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 a taxable annuity 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.