PTM073500 - Death benefits: lump sums: drawdown pension fund lump sum death benefit

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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

Conditions for paying a drawdown pension fund lump sum death benefit

Paragraph 17 Schedule 29 Finance Act 2004

This lump sum can be paid where:

  • a member with a drawdown pension fund (see PTM062500), or
  • a dependant with a dependants’ drawdown pension fund (see PTM072300)

dies with sums and assets remaining in their fund.

It is important to note that this lump sum is payable only from these types of funds and not from a flexi-access drawdown fund (see PTM062700) or a dependant’s flexi-access drawdown fund (see PTM072400). Go to PTM073600 for guidance about flexi-access drawdown lump sum death benefits that can be paid in respect of these funds.

Drawdown pension funds and dependant’s drawdown pension funds could be created before 6 April 2015 only. These funds may be converted to their flexi-access drawdown equivalents on or after 6 April 2015 as follows:

  • Drawdown pension funds providing flexible drawdown (see PTM062580) before 6 April 2015 converted to flexi-access drawdown funds on 6 April 2016.
  • Dependant’s drawdown pension funds providing dependants’ flexible drawdown (see PTM072330) converted to dependant’s flexi-access drawdown funds on 6 April 2016.
  • Members receiving capped drawdown (see PTM062520) can convert their drawdown pension fund to flexi-access drawdown any time after 5 April 2015. PTM062750 explains how a member can convert to flexi-access drawdown.
  • Dependants receiving capped drawdown (see PTM072320) can convert their dependants’ drawdown pension fund to dependant’s flexi-access drawdown any time after 5 April 2015. PTM072450 explains how a dependant can convert to dependant’s flexi- access drawdown.

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.

Where a member or dependant receiving a flexible drawdown pension or a dependant’s flexible drawdown pension died before 6 April 2015 the remainder of their flexible 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.

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 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 (see PTM073900), and
  • the amount of the payment is not more than the ‘permitted maximum’ – see The maximum drawdown pension fund lump sum death benefit payable.

These are the payment conditions for lump sums paid in respect of someone who died on or after 6 April 2011. The equivalent lump sum paid in respect of a member or dependant who died before 6 April 2011 is the unsecured pension lump sum death benefit. For guidance relating to payments made in respect of a member who died before 6 April 2011 see RPSM10105240 in the National Archives.

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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 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 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

The maximum amount that can be paid as a drawdown pension fund lump sum death benefit is referred to in the legislation as the ‘permitted maximum’. The ‘permitted maximum’ is the total of the amount of the sums and market value of the assets held in the member’s or dependant’s drawdown pension fund immediately before the lump sum is paid. This means that any growth in the value of the 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. It does not use up any of 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

The tax treatment of a drawdown pension fund lump sum death benefit depends on when the lump sum was paid. The date of the death of the member or dependant does not affect how the lump sum is taxed.

Death benefits before 6 April 2015

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

Lump sums paid before 6 April 2015 are subject to the special lump sum death benefits charge. The rate of the tax charge was 55 per cent (35 per cent for payments made before 6 April 2011).

Where the lump sum was paid by the scheme the person liable to pay the tax is the scheme administrator.

Where the lump sum was paid by an insurance company, that insurance company is liable to pay the tax charge as if they were the scheme administrator.

The tax charge should be reported and paid using the Accounting for Tax return – see PTM162000.

Death benefits between 6 April 2015 and 5 April 2016

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

The tax treatment of lump sums paid after 5 April 2015 but before 6 April 2016 depends on how old the member was when they died and when they are paid.

If the member (or dependant) was aged under 75 when they died the lump sum will not be taxable provided it is paid within two years of the earlier of:

  • the date the scheme administrator first knew of the member’s (or dependant’s) death, or
  • the date they could first reasonably have been expected to know of it.

The lump sum will be subject to the special lump sum death benefits charge if:

  • the member (or dependant) was 75 or older when they died, or
  • the lump sum was not paid within the two year payment period shown above.

The rate of the special lump sum death benefits charge during this period was 45 per cent.

The scheme administrator is liable to pay the tax charge where the lump sum was paid from the scheme.

Where the lump sum was paid by an insurance company, that insurance company is liable to pay the tax charge as if they were the scheme administrator.

The tax charge should be reported and paid using the Accounting for Tax return – see PTM162000.

Death benefits paid on or after 6 April 2016

Section 206 Finance Act 2004

Sections 636A(4) and (4ZA) and 636AA(3) and (4) Income Tax (Earnings and Pensions) Act 2003

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

The tax treatment of lump sums paid after 5 April 2016 depends on how old the member was when they died and when they are paid.

The drawdown pension lump sum death benefit will not be taxable if the member (or dependant) was aged under 75 when they died provided it is paid within two years of the earlier of:

  • the date the scheme administrator first knew of the member’s (or dependant’s) death, or
  • the date they could first reasonably have been expected to know of it.

The drawdown pension lump sum death benefit is taxable if

  • the member (or dependant) was 75 or older when they died, or
  • the lump sum was not paid within the two year payment period shown above.

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.

Go to PTM073010 for more detailed information on the tax treatment of lump sum death benefits, including the definition of a ‘non-qualifying person’.