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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: flexi-access drawdown fund lump sum death benefit

Glossary PTM000001
   

 

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

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). 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.

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

For a lump sum death benefit to be a flexi-access drawdown fund lump sum death benefit it must satisfy one of the following four sets of requirements:

  • the lump sum must be paid in respect of income withdrawal to which a member was entitled to be paid from their flexi-access drawdown fund in respect of an arrangement at the date of the member’s death and must not be a charity lump sum death benefit (see PTM073900), or
  • the lump sum must be paid on the death of a dependant in respect of dependants’ income withdrawal to which the dependant was at the date of their death entitled to be paid from their flexi-access drawdown fund in respect of an arrangement relating to the member and must not be a charity lump sum death benefit (see PTM073900), or
  • the lump sum must be paid on the death of a nominee in respect of nominees’ income withdrawal to which the nominee was at the date of their death entitled to be paid from their flexi-access drawdown fund in respect of an arrangement relating to the member and must not be a charity lump sum death benefit (see PTM073900), or
  • the lump sum must be paid on the death of a successor in respect of successors’ income withdrawal to which the successor was at the date of their death entitled to be paid from their flexi-access drawdown fund in respect of an arrangement relating to the member and must not be a charity lump sum death benefit (see PTM073900).

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

Paragraph 17A(6) Schedule 29 Finance Act 2004

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 in respect of the arrangement immediately before the payment is made. So the maximum is effectively whatever was held in the fund at the date of payment. If more than this amount is paid, the excess will be an unauthorised payment and taxed accordingly (see PTM131000).

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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 nor does it use up any of either the deceased’s or the recipient’s lifetime allowance.

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

Section 206 Finance Act 2004

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

Death benefit paid between 6 April 2015 and 5 April 2016

The tax treatment of the flexi-access drawdown fund lump sum death benefit depends on how old the member (or beneficiary) was when they died.

If the deceased member or beneficiary was under age 75 when they died, the lump sum was tax-free as long as the lump sum was paid within 2 years starting with the day on which the scheme administrator first knew (or if earlier could reasonably have been expected to know) of the member’s or beneficiary’s death.

If the member or beneficiary died aged 75 or more, or was under 75 but payment is not made within the two year period mentioned above, the special lump sum death benefits charge at the rate of 45 per cent was due on the payment. The scheme administrator is responsible for paying the special lump sum death benefits charge except that where the lump sum death benefit is paid by an insurance company then the insurance company becomes liable for the charge due. 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.

Death benefit paid on or after 6 April 2016

Where the member or beneficiary 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 beneficiary’s death or could reasonably have been expected to have known of the death,

the lump sum is payable tax-free.

The lump sum is taxable where:

  • the member or beneficiary 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 beneficiary’s death or could reasonably have been expected to have known of the death, or
  • the member or beneficiary was aged 75 or over when they died.

 

Whether a taxable flexi-access drawdown 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.