Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Pensions Tax Manual

From
HM Revenue & Customs
Updated
, see all updates

Death benefits: lump sums: life cover lump sum

Glossary PTM000001
   

 

Paying a life cover lump sum
Conditions for paying a life cover lump sum
When and to whom a life cover lump sum can be paid
A life cover lump sum and the lifetime allowance
How a life cover lump sum is taxed

Paying a life cover lump sum

Where a member of a retirement benefit scheme which before 6 April 2006 had been approved under Chapter 1 Part 14 Income and Corporation Taxes Act 1988 (ICTA 1988) was entitled to a small lump sum, which was generally designed to meet the cost of funeral expenses, if they died over age 75, the pension tax rules allow these schemes to continue to pay such lump sums as authorised payments. This lump sum is called a life cover lump sum.

Conditions for paying a life cover lump sum

Section 168(1) and paragraph 21A Schedule 29 Finance Act 2004

Regulation 6 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

A lump sum is a life cover lump sum if all the following conditions are met:

  • the member died aged 75 or over
  • the scheme was a retirement benefits scheme approved for the purposes of Chapter 1 Part 14 ICTA 1988 immediately before 6 April 2006,
  • payment of the lump sum would not have prejudiced the scheme’s approval for the purposes of Chapter 1 Part 14 ICTA 1988 if the lump sum had been paid on 6 April 2006,
  • the member had a right under the scheme to a life cover lump sum on 5 April 2006,
  • on 10 December 2003 the rules of the scheme contained a provision that either gave the member the right to a life cover lump sum on that date or would have done so had the individual been a member of the scheme on that date,
  • the rules of the scheme in relation to life cover lump sums have not changed since 10 December 2003, and
  • the member was either in receipt of benefits from the scheme on or before 5 April 2006 or was entitled to one or more life cover lump sums which in aggregate amount to £2,500 or less.

Top of page

When and to whom a life cover lump sum can be paid

The pensions tax rules do not set any conditions on who can be paid this type of lump sum or any time limit for its payment. However the rules of the member’s pension scheme may do so.

Top of page

A life cover lump sum and the lifetime allowance

A life cover 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.

Top of page

How a life cover lump sum is taxed

Section 636A(1) Income Tax (Earnings and Pensions) Act 2003

Regulation 7 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

A life cover lump sum is not liable to income tax so is payable tax-free.