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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: drawdown pension fund lump sum death benefit

Glossary PTM000001
   

 

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

Note: flexible drawdown funds in existence immediately before 6 April 2015 are from that date automatically treated as flexi-access drawdown funds, which have different rules. For guidance on lump sum death benefits from flexi-access drawdown funds, see PTM073600.

Note: Capped drawdown that began on or before 5 April 2015 may continue for the remainder of the member’s/dependant’s lifetime, providing there have been no events since that date resulting in the fund’s conversion to flexi-access drawdown. But no new capped drawdown funds or flexible drawdown funds may be set up from 6 April 2015 onwards. For guidance on flexi-access drawdown funds. See page PTM072400.

Paying a drawdown pension fund lump sum death benefit

Where a member or a dependant receiving a capped drawdown pension or a dependant’s capped drawdown pension dies, the remainder of the capped drawdown fund that is not a short-term annuity may be paid out as a lump sum. This lump sum is called a drawdown pension fund lump sum death benefit.

Conditions for paying a drawdown pension fund lump sum death benefit

Paragraph 17 Schedule 29 Finance Act 2004

A lump sum is a drawdown pension fund lump sum death benefit if it meets the following conditions:

  • it is paid in respect of either income withdrawal or dependants’ income withdrawal to which the member or dependant was entitled to be paid from their capped drawdown or dependant’s capped drawdown pension fund in a money purchase arrangement at the date of their death,
  • it is paid on the death of that member or dependant
  • It is not a charity lump sum death benefit.

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

Where the member or dependant died on or after 6 April 2011, a drawdown pension fund lump sum death benefit can be paid whatever age they were when they died. The pensions tax rules do not set any conditions on who can be paid this type of lump sum nor do they set any time limit for its payment. However the member’s or dependant’s pension scheme may have their own rules in respect of this payment.

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The maximum drawdown pension fund lump sum death benefit payable

Paragraph 17(3) and (4) Schedule 29 Finance Act 2004

If a lump sum meets the conditions for a drawdown pension fund lump sum death benefit but the amount of the lump sum exceeds the “permitted maximum” then the excess is not a drawdown pension fund 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.

The “permitted maximum” is the value of the sums and market value of the assets held in the member’s or dependant’s capped drawdown pension fund immediately before the lump sum is paid. This means that any growth in the value of the capped drawdown pension fund between the date of the member’s or dependant’s death and the date the lump sum is paid is part of the drawdown pension fund lump sum death benefit.

Any amount paid beyond this amount is not a drawdown pension fund lump sum death benefit.

The definition of drawdown pension fund excludes any amount that may have been used to buy a short-term annuity. So the amount of a drawdown pension fund lump sum death benefit is limited to the value of the residual funds held in the arrangement.

The only payments that may be made in relation to a short-term annuity contract in payment to the deceased member or dependant at the date of their death is the continuation of any annuity payments payable under a term-certain guarantee, if one was attached to the contract.

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A drawdown pension fund lump sum death benefit and the lifetime allowance

A drawdown pension fund 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 drawdown pension fund lump sum death benefit is taxed

Section 206 Finance Act 2004

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

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

Death benefits 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 benefits between 6 April 2015 and 5 April 2016

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

  • the member or dependant was under age 75 when they died: the lump sum was payable tax-free provided the lump sum was paid within two years of the day on which the scheme administrator either first knew of the member’s or dependant’s death or could reasonably have been expected to have known of the death.
  • the member or dependant was under age 75 when they died but the lump sum was not paid within two years of the day on which the scheme administrator either first knew of the member’s or dependant’s death or could reasonably have been expected to have known of the death: 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.
  • the member or dependant 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 benefits paid on or after 6 April 2016

Where the member or dependant was:

  • under age 75 when they died, and
  • the payment was made within 2 years of the day on which the scheme administrator either first knew of the member’s or dependant’s death or could reasonably been expected to have known of the death,

the drawdown pension fund lump sum death benefit is payable tax-free.

The drawdown pension fund lump sum death benefit is taxable where:

  • the member or dependant was under age 75 when they died but the payment was not made within 2 years of the day on which the scheme administrator either first knew of the member’s or dependant’s death or could reasonably have been expected to have known of the death, or
  • the member was aged 75 or over when they died.

 

Whether a taxable drawdown pension fund 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.