PTM073600 - Death benefits: lump sums: flexi-access drawdown fund lump sum death benefit

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Conditions for paying a flexi-access drawdown fund lump sum death benefit
When and to whom a flexi-access drawdown fund lump sum death benefit can be paid
The maximum flexi-access drawdown fund lump sum death benefit payable
A flexi-access drawdown fund lump sum death benefit and the lifetime allowance
Taxation of a flexi-access drawdown fund lump sum death benefit

Conditions for paying a flexi-access drawdown fund lump sum death benefit

Paragraph 17A Schedule 29 Finance Act 2004

This lump sum can only be provided if it is paid from a money purchase arrangement and is paid on or after 6 April 2015 (even though the member may have died before that date).

This lump sum can be paid where:

  • a member with a flexi-access drawdown pension (see PTM062700),
  • a dependant with a dependants’ flexi-access drawdown pension (see PTM072400),
  • a nominee with a nominee’s flexi-access drawdown pension (see PTM072400), or
  • a successor with a successor’s flexi-access drawdown pension (see PTM072400)

dies with sums and assets remaining in their flexi-access drawdown fund.

Payable as a result of a member’s death

A lump sum payable on the death of a member is a flexi-access drawdown fund lump sum death benefit if it meets the following conditions:

Payable as a result of a dependant’s death

A lump sum payable on the death of a dependant of the member is a flexi-access drawdown fund lump sum death benefit if it meets the following conditions:

  • it is paid in respect of dependants’ income withdrawal to which the dependant was entitled to be paid from their dependant’s flexi-access drawdown fund at the date of their death,
  • it is not a charity lump sum death benefit, and
  • the amount of the payment is not more than the ‘permitted maximum’ – see The maximum flexi-access drawdown fund lump sum death benefit payable.

Payable as a result of a nominee’s death

A lump sum payable on the death of a nominee of the member is a flexi-access drawdown fund lump sum death benefit if it meets the following conditions:

  • it is paid in respect of nominees’ income withdrawal to which the nominee was entitled to be paid from their nominee’s flexi-access drawdown fund at the date of their death,
  • 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 flexi-access drawdown fund lump sum death benefit payable.

Payable as a result of a successor’s death

A lump sum payable on the death of a successor of the member is a flexi-access drawdown fund lump sum death benefit if it meets the following conditions:

  • it is paid in respect of successors’ income withdrawal to which the successor was entitled to be paid from their successor’s flexi-access drawdown fund at the date of their death,
  • it is not a charity lump sum death benefit, and
  • the amount of the payment is not more than the ‘permitted maximum’ – see The maximum flexi-access drawdown fund lump sum death benefit payable.

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When and to whom a flexi-access drawdown fund lump sum death benefit can be paid

A flexi-access drawdown fund lump sum death benefit can be paid whatever age the member was when they died. There is no time limit for the payment of this lump sum.

The tax rules do not set any conditions on who can be paid this type of lump sum. However, the rules of the pension scheme may do so.

The maximum flexi-access drawdown fund lump sum death benefit payable

Paragraph 17A(6) Schedule 29 Finance Act 2004

If the amount of the lump sum is more than the ‘permitted maximum’, the excess amount is not a flexi-access drawdown fund 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 ‘permitted maximum’ will be a flexi-access drawdown fund lump sum death benefit.

The maximum amount of lump sum payable is an amount equal to the combined total of all the sums and the market value of the assets representing the member’s or appropriate beneficiary’s flexi-access drawdown fund immediately before the payment is made. So the maximum is effectively whatever was held in the fund at the date of payment.

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A flexi-access drawdown fund lump sum death benefit and the lifetime allowance

A flexi-access drawdown 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’s or the recipient’s lifetime allowance.

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Taxation of a flexi-access drawdown fund lump sum death benefit

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

Death benefit paid between 6 April 2015 and 5 April 2016

Section 206 Finance Act 2004

Section 636A(4)(d) 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 or beneficiary was when they died and when the lump sum is paid.

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

  • the date the scheme administrator first knew of the member’s (or beneficiary’s) death, or
  • if earlier, 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 beneficiary) 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 person who received the lump sum is not liable to the tax charge. The scheme administrator or insurance company will invariably deduct the tax due before paying the lump sum.

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

Death benefit paid on or after 6 April 2016

Section 206 Finance Act 2004

Sections 636A(4) and (4ZA) and 636AA(3) to (5) 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 or beneficiary was when they died, when the lump sum is paid and to whom it is paid.

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

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

The flexi-access drawdown fund 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’.