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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: trivial commutation lump sum death benefit

Glossary PTM000001
   

 

Paying a trivial commutation lump sum death benefit
Conditions for paying a trivial commutation lump sum death benefit
The maximum trivial commutation lump sum death benefit payable
When a trivial commutation lump sum death benefit can be paid
Who can be paid a trivial commutation lump sum death benefit
A trivial commutation lump sum death benefit and the lifetime allowance
How a trivial commutation lump sum death benefit is taxed

Paying a trivial commutation lump sum death benefit

Where an individual is entitled to either:

  • a small dependant’s pension, or
  • a member’s pension which continues to be paid after the member’s death because the member’s pension was guaranteed for a term certain and the member died before the guarantee period had expired

from a registered pension scheme, that pension can be commuted and taken in lump sum form as a trivial commutation lump sum death benefit. To be a trivial commutation lump sum death benefit the lump sum must meet the conditions set out below.

Conditions for paying a trivial commutation lump sum death benefit

Paragraph 20 Schedule 29 Finance Act 2004

Payment to a dependant

To be a trivial commutation lump sum death benefit, a lump sum paid to a dependant must:

  • be paid to a dependant who is entitled under the pension scheme to a pension death benefit in respect of the member, and
  • extinguish that dependant’s entitlement to both pension and lump sum death benefits under the scheme in respect of the member.

Payment to any individual

To be a trivial commutation lump sum death benefit, a lump sum paid to any individual must be paid after the member’s death to an individual entitled to be paid the member’s scheme pension or annuity for the remaining period of any guarantee period attaching to the scheme pension or annuity, and must either:

  • extinguish all the individual’s entitlements to receive payment of the member’s scheme pension(s) payable for a guarantee period by the scheme administrator, or
  • extinguish all the individual’s entitlements under an annuity contract under which an insurance company was paying an annuity or scheme pension to the deceased member.

The maximum length of the guarantee period for an annuity where the member’s entitlement arose before 6 April 2015 was a term certain of 10 years. Where the member’s entitlement to an annuity arose on or after that date the term certain can be for any length of time.

A scheme pension may only be guaranteed for up to 10 years from the date of entitlement, regardless of what date it was.

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The maximum trivial commutation lump sum death benefit payable

Paragraph 20 Schedule 29 Finance Act 2004

Where a lump sum meets the conditions for a trivial commutation lump sum death benefit, the maximum amount that can be paid as a trivial commutation lump sum death benefit from any registered pension scheme is £30,000 (£18,000 for a lump sum paid before 6 April 2015). This is the maximum amount per scheme, not a maximum across all schemes. Where the amount of the lump sum paid is more than £30,000, the excess is not a trivial commutation lump sum death benefit. If it cannot be paid as some other type of authorised lump sum death benefit the excess is an unauthorised member payment and taxed accordingly (see PTM131000).

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When a trivial commutation lump sum death benefit can be paid

Paragraph 20 Schedule 29 Finance Act 2004

A lump sum paid on or after 6 April 2015 can qualify as a trivial commutation lump sum death benefit (subject to the other conditions described on this page) whatever age the member was when they died, regardless of whether their death occurred before or after 6 April 2011. There is no time limit for making the payment. The dependant’s pension or the remainder of the member’s pension payable under a guarantee can be commuted either at the outset or at any time thereafter.

Payments made between 6 April 2011 and 5 April 2015 (inclusive) could qualify as trivial commutation lump sum death benefits (subject to the other conditions described on this page) where the member died:

  • on or after 6 April 2011 at any age, or
  • before 6 April 2011 and had not reached age 75 and the payment was before the date the member would have reached age 75 had they still been living.

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Who can be paid a trivial commutation lump sum death benefit

Paragraph 20 Schedule 29 Finance Act 2004

A dependant of the member can be paid a trivial commutation lump sum death benefit where they are the dependant who was entitled to be paid the dependant’s pension.

The individual who was entitled to be paid the member’s guaranteed pension for the remainder of the guarantee period during which it is payable can be paid the trivial commutation lump sum death benefit where that continuing pension is instead commuted to a lump sum.

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A trivial commutation lump sum death benefit and the lifetime allowance

A trivial commutation 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 trivial commutation lump sum death benefit is taxed

Sections 579A, 579D and 683 Income Tax (Earnings and Pensions) Act 2003

Regulation 11 Income Tax (PAYE) Regulations 2003 - SI 2003/2682

The whole lump sum is taxable as pension income of the dependant or individual entitled to receive it. The pension scheme administrator must apply PAYE to the lump sum payment before paying the lump sum.

As the payments are taxable as pension income the rate of tax is the lump sum recipient’s marginal rate of tax for the tax year in which the lump sum is paid. So, if the individual is a basic rate taxpayer, the rate is basic rate and if the individual is a higher rate taxpayer the rate is the higher rate applying to the individual.

Where the lump sum payment is in respect of a pension already in payment to the dependant or individual, the PAYE code already in operation should be used.

Where the pension being commuted was not already in payment to the dependant or individual, the basic rate (BR) tax code should be used.

Guidance on how to operate PAYE correctly on these lump sums can be found in CWG2 - Employer’s further guide to PAYE and NICs.

Because of the way PAYE works, using the BR code on these lump sum payments may mean that the recipient ends up paying too much tax. Where this does happen, the person who has paid too much tax can claim the tax back in-year. There is guidance for individuals on how to do this on the GOV.uk website.

The problem is that many of the people affected won’t know that they may have paid too much tax and so are entitled to a tax refund. To help the people affected please include advice on how to claim a refund when you issue the lump sum payment. Some suggested wording that you could use is shown below. This will also help you by reducing the number of enquiries you may get on how the lump sum has been taxed and claiming refunds.

Suggested wording pension payers can use when making the lump sum payment

“Your form P45 details include the amount of tax deducted from your pension commutation lump sum. The tax deducted may not be the right amount due when all of your income for the year is taken into account.

After next 5 April HM Revenue & Customs will check if you have paid the correct amount of tax, and if not they will contact you. But if you think you have paid too much tax you can ask HM Revenue & Customs for a tax refund now - you do not have to wait until 5 April.

To claim a refund you can complete form P53 online without needing to contact HMRC directly. You should find this easier to do than completing the form manually. The form is available on the GOV.uk website.

If you prefer to complete the form manually, call the Taxes Helpline on 0300 200 3300 and ask for form P53. It helps if you have your National Insurance number to hand when you call.”

There is also guidance for pension schemes on how to operate PAYE on the GOV.uk website. This includes guidance on how to operate PAYE on trivial and winding up lump sums.