PTM073700 - Death benefits: lump sums: trivial commutation lump sum death benefit

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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 under a pension guarantee (see PTM071500)

from a registered pension scheme, that pension can be commuted and taken as a lump suminstead. This is 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

A trivial commutation lump sum death benefit can be from a defined benefits, cash balance or other money purchase arrangement

Commuting a dependant’s pension

Paragraph 20(1A) Schedule 29 Finance Act 2004

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.

These are the payment conditions for lump sums paid in respect of someone who died on or after 6 April 2011. For guidance relating to payments made in respect of a member who died before 6 April 2011 see RPSM10105260 on the National Archives.

Commuting a pension guarantee

Paragraph 20(1B) Schedule 29 Finance Act 2004

From 6 April 2015 a scheme pension or annuity that continues to be paid under a pension guarantee (see PTM071500) may be commuted into a trivial commutation lump sum death benefit.

If the scheme pension is payable by a scheme administrator the lump sum must extinguish all the individual’s entitlements to receive scheme pension guarantee payments from the scheme.

If the scheme pension or annuity is payable by an insurance company the payment must extinguish all the individual’s entitlements under the contract providing the guaranteed pension or annuity.

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The maximum trivial commutation lump sum death benefit payable

Paragraph 20(2) Schedule 29 Finance Act 2004

The maximum amount that can be paid from a scheme as a trivial commutation lump sum death benefit is £30,000. If the lump sum was paid between 6 April 2012 and 5 April 2015 the maximum trivial commutation lump sum death benefit was £18,000. For payments made before 6 April 2012 the maximum amount of the lump sum was 1 per cent of the standard lifetime allowance.

This is the maximum amount per scheme, not a maximum across all schemes.

Where the amount of the lump sum paid is more than the maximum amount, 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

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.

If the:

  • lump sum was paid on or after 6 April 2015, or
  • member died after 5 April 2011

a trivial commutation lump sum death benefit can be paid whatever age the member was when they died.

If the lump sum was paid before 6 April 2015 and the member died before 6 April 2011 then a trivial commutation lump sum death benefit may be paid only if:

  • the member was aged under 75 when they died, and
  • the lump sum is paid before the day the member would have reached age 75.

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Who can be paid a trivial commutation lump sum death benefit

Paragraph 20 Schedule 29 Finance Act 2004

Where a dependants’ pension is being commuted, the lump sum is payable to the dependant entitled to be paid that dependants’ pension.

Where a pension paid under a pension guarantee is being commuted, the lump sum is payable to the individual entitled to be paid that guaranteed pension.

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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. 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 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.