On the death of a scheme member death benefits become payable.
Death benefits can be paid out as:
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'authorised pension death benefit' - an income paid to a member's dependant (i.e. a spouse's/dependants pension) and/or
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'authorised lump sum death benefit' - paid out as a lump sum, not necessarily to a dependant.
Payments made on the death of the member are either authorised or unauthorised.
The exact benefits payable/allowable and the recipient depend on the scheme rules, the member's age, whether the member had crystallised his/her benefits or not and if so, whether he/she had a lifetime annuity, a scheme pension, a drawdown pension and whether or not there is a surviving dependant.
Some of the authorised death benefits detailed in the rest of this section may also be payable on the subsequent death of a surviving spouse. This depends on the scheme rules, whether the surviving spouse held a lifetime annuity, a scheme pension, a dependant's drawdown pension and whether there are any additional surviving dependant's of the original member.
Any payment that is not one of these benefits is an unauthorised payment and is taxed as such.
See further information on unauthorised payments.
We only look at death benefits for those who die after 6 April 2011 for deaths prior to this date: see further information.
Key Points
Authorised Pension Death Benefits
As their name suggests these benefits are paid in the form of an income.
They can be paid only to:
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a person who is a dependant of the member at the date of the member's death, or
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a person married to a member at the time the member's pension entitlement first arises under a registered pension scheme.
It is up to the scheme administrator to decide whether an individual is a dependant of the member.
A person is a dependant if:
- they were married to or the civil partner of the member at the date they died or when they became entitled to a pension
- they were the child of the member when the member died and they
- had not reached the age of 23, or
- had reached age 23 and were dependent on the member because of physical or mental impairment, in the opinion of the scheme administrator, or
- are covered by any of the transitional provisions described below
- they were neither married to, or the civil partner of, nor a child of the member when they died but, in the opinion of the scheme administrator, they were:
- financially dependent on the member, or
- financially interdependent on the member (mutual dependence), or
- dependent on the member because of physical or mental impairment.
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dependants' annuity
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dependants' scheme pension
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dependants' drawdown pension
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uncrystallised funds, or
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drawdown funds
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be purchased from an insurance company chosen by the member (if already purchased) or dependant (if not yet purchased). Legislation states that the member (or dependant if an annuity has not already been purchased) must be given the opportunity to choose the insurance company (OMO)
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only provide the dependant with a guaranteed entitlement to a lifetime pension OR a pension until a certain point (or when certain circumstances arise - e.g. remarriage). If the payment is to a dependant who is not the member's child, payment must normally be for life (although again the scheme rules may provide that payment ceases if the dependant (re)marries).
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be paid at least once a year in advance or in arrears
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not provide for the direct / indirect payment of capital or pension payments triggered by the death of the dependant
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be a level annuity, increasing annuity or relevant linked annuity*
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does not trigger a lifetime allowance test and is not classed as a 'benefit crystallisation event'.
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cannot be guaranteed for a 'term-certain'
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cannot be given 'annuity protection'
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does not generate entitlement to the payment of a pension commencement lump sum
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cannot provide for the continuation of the annuity beyond the death of the dependant.
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uncrystallised funds
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drawdown pension fund
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dependants drawdown fund
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provide the dependant with a guaranteed entitlement to a pension, either for life or up to a certain point (or when certain circumstances arise, can also be reduced). If the payment is to a dependant who is not the member's child, or to a child over 23, payment must normally be for life (although the scheme rules may provide that payment ceases if the dependant (re)marries). If the payment is to a dependent child, this can only be paid whilst the dependant still meets the dependency criteria (i.e. to 23 at the time of the member's death).
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be paid at least annually
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be paid by the Scheme Administrator (or if the liability has been secured through an annuity contract, by the Insurance company underwriting the contract).
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does not trigger a lifetime allowance test and is not classed as a 'benefit crystallisation event'.
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cannot be guaranteed for a 'term-certain'
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cannot be given 'pension protection'
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does not generate entitlement to the payment of a pension commencement lump sum when entitlement first arises
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cannot give rise to any further benefit on the death of the dependant**.
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if the member dies on or after age 75, and
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if the member dies after 5 April 2006, and
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a scheme pension was being paid at the member's date of death, or he or she was prospectively entitled to one
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unvested funds, and/or
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drawdown funds
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drawdown (income withdrawals) and / or
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if the dependant wishes and scheme rules permit, a short term annuity.
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does not give entitlement to a pension commencement lump sum; and
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does not trigger a lifetime allowance test.
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is calculated at the point the dependant first becomes entitled to such a pension under the arrangement. That is, the date that funds are designated not the date of the member's death. No payments can be backdated to the member's date of death - the date of entitlement is the date the funds are designated
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applies for the next 12-month period and all following 12-month periods until a review is triggered or payments stop (called pension years)
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is calculated using the dependant's age so as to reflect the level of Lifetime annuity income the dependant could get using Government Actuary Department (GAD) comparison tables.
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the maximum is 120% of the 'Basis amount' (the equivalent of a single life non guaranteed annuity). This caps the aggregate level of drawdown pension that can be paid (or secured through Short-term annuity contracts) from the drawdown pension fund.
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The maximum used to be 100% of the basis amount but this was changed by Finance Act 2013 to 120% of the basis amount for dependants drawdown pension years starting after 26 March 2013.
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paid out as a drawdown pension fund lump sum death benefit (taxed at 55%, deducted before payment), or
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designated to provide any other dependant of the original member (at the time of the member's death) with a dependant's drawdown pension fund or
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used to provide that or those dependants with an annuity (or where provided a dependant's scheme pension), or used to provide a charity lump sum death benefit.
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purchased from an Insurance company chosen by the dependant using the dependants' drawdown pension fund
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payable for a term not exceeding five years
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payable at least once a year in advance or arrears
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either a level annuity, increasing annuity or relevant linked annuity
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must not provide for the direct or indirect payment of capital payments triggered by the death of the dependant, or pay a dependant's drawdown pension after the death of the dependant.
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a trivial commutation lump sum death benefit or a winding up lump sum death benefit which must be paid to a dependant
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a charity lump sum death benefit which must be paid to a charity.
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Defined benefit LSDB
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Annuity protection LSDB and Pension protection LSDB
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an Uncrystallised funds LSDB
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a Drawdown pension fund LSDB
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a Trivial commutation LSDB
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a Charity LSDB
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a Winding-up LSDB
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if they die before age 75 the payment must be made within 2 years of the date the administrator knew of the death or could reasonably have known about the death
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if they die after age 75 there is no timescale on payment.
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a set amount promised by the scheme,
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linked to the member's salary the time of death or
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based on some other measure, but
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cannot be based on the amount of funds available to provide the benefit (this is not a DBLSDB).
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a multiple of earnings e.g. 2 x final salary (e.g. group life assurance payable on death in service), or
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a multiple of service e.g. £500 for each year of service with the employer, or
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a multiple of another factor e.g. 3 x prospective pension or 10% of the employer's profits in the accounting period before the member's death, or
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a lump sum of a fixed amount of benefit e.g. £100,000 even if provided by a life cover policy.
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the capital value of the pension benefit that crystallises for lifetime allowance purposes at the time the pension entitlement arose.
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the pension instalments paid up to the date the member died.
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it is paid on the death of the member
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it can only be paid from a money purchase arrangement
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there must be no dependants of the member
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it is paid in respect of drawdown pension funds regardless of the age at death; or unvested funds where the member died after age 75
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it is paid to a charity nominated by the member
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it must be paid on the death of the dependant
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there must be no other dependants' of the original member
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it is paid to a charity nominated by the original member or the dependant
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an uncrystallised funds lump sum death benefit
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defined benefit lump sum death benefit
Para 15, Sch 28][Para 26, Sch 10, FA 2005]
A dependant's pension does not have to start immediately after the member's death. The pension can be deferred to a later date. If commencement of a dependant's pension is delayed, eligibility for the dependant's pension must be checked at the date the member died (not the date the pension is to start).
Forms of Pension Death Benefit
There are three forms of pension death benefit that can potentially be provided to a surviving dependant(s) of the member from a money purchase scheme a:
Dependants' Annuity
A dependants' annuity can be purchased, by the dependant, from any:
remaining at the member's death. A dependant's annuity may also be purchased at a later date from a dependant's drawdown pension fund.
A dependants' annuity contract must:
*varies in a manner described in our What is an annuity? article.
Unlike a member's Lifetime Annuity, a dependants' annuity:
If the payment is to a dependant who is not the member's child, the payment must normally be for life (although the contract may provide that payment ceases if the dependant (re)marries). If the payment is to a dependent child, this can only be paid whilst the dependant still meets the dependency criteria (i.e. to age 23). The contract may also specify that payments cease if the dependent child marries.
A dependant's annuity is taxable as pension income under PAYE at the dependant's marginal rate of tax.
If the member purchased their own lifetime annuity, it may have been purchased on a joint life basis, in which case a dependant's annuity will to may come into payment upon the member's death. For further information on survivors annuities see What is an annuity? article.
Transfer of dependant's annuity after benefit crystallisation event
Regulations provide for the transfer of sums / assets by registered pension schemes and insurance companies, where those sums / assets represent pensions in payment.
Where a dependants annuity is reduced/stopped due to a transfer of sums/assets and a new dependant's annuity is not payable in relation to the transferred amounts, the value of the transfer is classed as an unauthorised payment made by the original (rather than receiving) registered pension scheme. The same is true in relation to a dependant's short-term annuity.
The Registered Pension Schemes (Transfer of Sums and Assets) Regulations 2006
Annuity contracts purchased before 6 April 2006
An annuity contract purchased before 6 April 2006 and in payment at that date is not a registered pension scheme. As such, any pension death benefit provided by the contract will reflect the dependency rules in force up to 5 April 2006.
Dependants scheme pension
A dependants' scheme pension is the only type of pension death benefit that can be provided by a Defined Benefit arrangement. They can also be provided from money purchase arrangements.
They are essentially the same as a scheme pension provided to the member of a registered pension scheme.
A dependant's scheme pension can be provided for the dependant, from any:
remaining on the member's / dependants death.
A dependants' scheme pension must:
Unlike a member's scheme pension, a dependants' scheme pension:
**continued pensions to a dependant of the original member are allowed e.g. childs pensions may be payable after a spouses pension ends.
Dependant's Scheme Pension Limit
The amount of dependant's scheme pension is limited in certain circumstances:
If these conditions are met, the aggregate dependant's scheme pension payable to any dependants of the member must not exceed 100% of the member's scheme pension payable at the date he or she died.
The calculation of the limit is prescribed, but is broadly equal to 100% of the pension paid to the member in the 12 months preceding his date of death plus 5% of any pension commencement lump sum paid. If the member has not been in receipt of a pension for more than 12 months, the amount he would have received in the first 12 months.
The subsequent increases that can be granted to a dependant's scheme pension that has been limited are also limited. For full details see RPSM10104130 onwards.
If the member's scheme pension was purchased on a joint life basis, a dependant's scheme pension will automatically come into payment upon the member's death. For further information on survivors annuities see the What is an annuity? article.
Pension payments may also include guaranteed periods which are covered in the What is an annuity? article.
A dependant's scheme Pension is taxed as earnings under PAYE at the dependant's marginal rate of tax.
Scheme pension was in payment to a member or dependant on 5 April 2006
The limit on a dependant's scheme pension applies only where the member dies after 5 April 2006.
Where the member's scheme pension was in payment on 5 April 2006 and the member dies subsequent to that date the limit on the dependants scheme pension does not apply.
The Taxation of Pension Schemes (Transitional Provisions) Order 2006
Transfer of dependant's scheme pension after benefit crystallisation event
Regulations provide for the transfer of sums / assets by registered pension schemes and insurance companies, where those sums / assets represent pensions in payment.
A transfer of sums/assets from a dependant's scheme pension between registered pension schemes is only treated as being a recognised transfer if those sums/assets are applied for the provision of a new dependant's scheme pension.
Where the dependant's scheme pension is being paid by an insurance company the amount transferred is treated as an unauthorised payment if a new dependant's scheme pension is not provided.
The Registered Pension Schemes (Transfer of Sums and Assets) Regulations 2006
Dependants' Drawdown Pension
A dependants' drawdown pension is essentially the same as the member versions, but they are provided on the member's death, for a dependant.
Where the dependant meets the Minimum Income Requirement they can make a declaration to have dependant's flexible drawdown which will operate on the same basis as Flexible Drawdown.
Where a member of a money purchase arrangement dies with either:
remaining in the arrangement (s), the member's dependant(s) may use the funds to generate a dependants' drawdown pension if they do not wish to secure an annuity contract or scheme pension.
These funds become the 'dependants' drawdown pension fund'. The dependant's drawdown pension fund may be used to provide income through either
The same rules govern the payment of a dependant's drawdown pension as the payment of a member's drawdown pension.
There is a maximum amount that can be paid as a total from the dependant's drawdown pension fund, whether it is paid as income drawdown or as a short-term annuity (see below).
There's no minimum amount that has to be taken each year and any payment over the maximum is an unauthorised payment.
The main difference with the designation of dependants' drawdown is it:
Maximum from drawdown pension fund
The maximum level of dependants' drawdown pension payable
See GAD tables effective from 6 April 2011 GAD tables effective from 6 April 2011. Further to the Test Achats ruling male tables have been used for all GAD calculations effective after 21 December 2012.
The process is reviewed in the same way as member's drawdown income i.e. every 3 years before 75 and annually thereafter.
The overall maximum is the same whether the pension is drawn as income, secured through a short-term annuity or taken as a combination of the two.
A separate GAD table has been provided for the purposes of calculating the maximum for a child dependant if that benefit is not being provided under the physical or mental impairment condition as this pension must cease by age 23.
Where the dependant dies or reaches age 75 in a pension year, that year is deemed to have ended immediately before the event occurs. However, for limit purposes, the maximum income for the whole year is allowed for the shortened period.
It is the Scheme Administrator's responsibility to ensure that the maximum limits are not exceeded and that reviews of the maximum occur as and when required.
Review of Dependants Drawdown Pension Limit
The maximum drawdown pension limit must be reviewed every 3 years before age 75 or annually thereafter (a formal review).
The review must take place on the 'reference date': the first day of the 4th Pension year, the 7th Pension year and so on. This review pattern must continue until the dependant dies, reaches age 75 or the entire drawdown pension fund is used to buy a lifetime annuity. Each 3-year period (1 year after age 75) is a 'reference period'.
More frequent reviews are not permitted unless:
1) additional funds are designated, or
2) a dependants lifetime annuity is purchased using drawdown funds or part of the fund is surrendered to provide a dependants scheme pension
3) a pension sharing event (pension debit) occurs
4) the dependant requests that the reference period is reset and the scheme administrator agrees.
When this happens, an earlier review of the maximum is required. These events, and the review triggered, do not disrupt the existing pension year structure, or the formal reviews (except number 4).
All that happens is that the maximum amount is revised for any pension years remaining in the current reference period.
HMRC allows some flexibility in carrying out the formal reviews. They give a 60-day window, before the start of a new review period. This gives some flexibility in the timing for the actual calculation to be made (this date is known as the nominated date and does not change the official date of the next formal review). This flexibility is not available on the first calculation or where the review is triggered early as described above.
It is also possible for the calculations to be performed on the dependant's 75th birthday as opposed to the start of the first pension year post age 75.
Where drawdown pension funds are reduced (i.e. through an annuity purchase, surrender for a scheme pension or a pension debit applied) a review is triggered. The new limit applies from the next pension year (not the current year). As such, if the reduction occurs in the year before a formal review is required, no additional review is triggered.
Dependant dies whilst in receipt of dependant's drawdown pension
Where a dependant dies any remaining dependant's drawdown pension fund may be:
Taxation of dependants drawdown pension
A dependant's drawdown pension is taxable on the dependant under PAYE. If the maximum income limit is breached in a pension year, the excess is considered an unauthorised payment and taxed as such.
Transfer of a dependant's drawdown pension fund and dependant's short term annuity
If the transfer is taking place between different arrangements within the same registered pension scheme, the transfer is effectively disregarded and the dependants drawdown pension is treated as though it is still held under the original arrangement.
A transfer of a dependant's drawdown pension fund to another arrangement may only take place if the transfer is to a new arrangement under that (new) scheme and that arrangement has no other sums or assets held in it. Any other transfer is treated as an unauthorised payment.
The review periods and income limits remain unchanged on transfer in the same way as the transfer of a drawdown pension.
An insurance company that holds a dependant's short-term annuity contract may transfer this to another insurance company and providing the receiving company treats the new contract in exactly the same way, there is no penalty.
Accessing dependants' drawdown
It is important to note that for dependants' drawdown to be an option then dependants' drawdown must be available under the rules of the scheme that the member was in on their death.
If a scheme does not allow dependants drawdown as a death benefit then dependants drawdown will not be available as it is not allowed to transfer to a new scheme to designate a dependants drawdown.
Dependant's Short Term Annuity Contract
One option available to a dependant with a dependants' drawdown pension fund is to purchase a dependants' short-term annuity.
A dependant's short-term annuity contract must be:
and
The maximum dependant's drawdown pension that may be payable includes any short-term annuity purchased. It is the Scheme Administrator's responsibility to ensure payments do not exceed the maximum. If the maximum drawdown pension has been recalculated due to a five-year review, any short-term annuity already purchased must be considered against the new maximum limits.
Pt 3 s167 and Sch 28 Pt2 Finance Act 2004 as amended
Authorised Lump Sum Death Benefits
A lump sum death benefit (LSDB) does not have to be paid to a dependant of the member, it may be paid to any nominated beneficiary (including a company, trust, charity or the members' legal personal representative(s)).
In some instances they may be payable to the estate as of right e.g. s226/ Retirement Annuity Contract plans that are not written under trust.
The exceptions to this are:
Scheme rules and/or trust deeds and/or contract conditions will determine how and to whom any lump sum death benefits are distributed. This can have an impact on a member's Inheritance Tax position. For further details see the Inheritance Tax and Pensions article.
There are various rules and regulations that personal representatives and recipients of lump sum death benefits in excess of the lifetime allowance need to be aware of. These are covered in more detail in our leaflet in the support section see Lump sum death benefits over the Lifetime Allowance.
Forms of Lump Sum Death Benefit
The following lump sums may be paid on death from a scheme, in certain circumstances;
What can and cannot be paid depends on the scheme rules and whether the arrangements are defined benefit or money purchase.
The tax treatment of each type of lump sum is covered in their individual sections below.
Defined Benefits Lump Sum Death Benefit
As its name suggests, only defined benefit arrangements can provide a defined benefits LSDB.
There are time limits on the payments depending on when the member dies:
The payment of a defined benefit funds lump sum death benefit triggers a lifetime allowance test (BCE 7). Prior to age 75, the amount paid, or crystallising, is the amount tested against the member's Lifetime allowance.
After age 75 there is no BCE but a tax charge of 55% would apply.
There is no limit on the level of defined benefits lump sum death benefit that can be paid from a scheme. The amount paid may be:
Defined benefits lump sum death benefit is tax-free so long as it is within the member's remaining lifetime allowance. Any part of the payment outside of the lifetime allowance is a chargeable amount and taxed at 55%, due on the recipient of the payment.
However, the personal representatives are responsible for identifying whether a chargeable amount has arisen following the payment of a relevant lump sum death benefit. They only need to do this after the payment of any lump sum death benefit.
Therefore, the provider may pay the lump sum death benefits in full, without regard to any lifetime allowance charge that may potentially be due.
Where the personal representatives identify a chargeable amount, they must report this to HMRC, who then assesses the recipient of any payment that may give rise to a chargeable amount (55% of the lump sum).
Therefore, the personal representatives must be provided with the percentage of the standard lifetime allowance used up by a relevant lump sum death benefit within 3 months of the payment. The personal representatives may also request the percentage of the standard lifetime allowance that the member had crystallised to date, i.e. to enable them to calculate any charge due. This must be provided within 2 months of their request.
s206 and s217(2) The Registered Pension Schemes (Provision of Information) Regulations 2006 - SI2006/567
If BCE 7 (a relevant lump sum death benefit) is the first BCE triggered after A day, then any pre A day pension in payment must be included when calculating the percentage of lifetime allowance already used up. The calculation is 25 x the pension in payment at the date of death.
s219(8) Para 10(2) and 20, Sch 36 The Taxation of Pension Schemes (Transitional Provisions) Order SI 2006/572
A term-assurance policy that pays out a benefit on the death of the member by reference to the individual's salary is providing a defined benefit. However a policy that pays out a set monetary amount is providing a cash balance benefit and as such cannot be classed as a defined benefit lump sum death benefit and is likely to be paid as an uncrystallised lump sum death benefit.
A lump sum payable under a 5 year guarantee can be treated as a DBLSDB as long as it meets the conditions of being paid from a DB scheme and being based on a defined calculation rather than based on the amount of funds available. The member must also have not asked for the guarantee to be paid as a pension protection lump sum death benefit (which is not tested against SLA but tax is charged at 55%).
It is not uncommon for schemes to use this approach as an alternative to commuting 5 year guarantee periods which ceased to be allowable from A day.
HMRC give the following examples of lump sums payable on death that would qualify as a defined benefits lump sum death benefit:
However, a fixed amount of £100,000 that is paid out on death but which is not expressed in benefit terms and might be paid as either a pension or a lump sum (i.e. where the form of benefit is to be decided on or after death), is NOT a defined benefits LSDB but a cash balance benefit.
Contracted Out Benefits
A spouse's GMP cannot be commuted for a Defined Benefit Lump Sum Death Benefit - it must be paid either as a pension, as a trivial commutation LSDB or as a winding up LSDB. However, the calculation of the DBLSDB can include the value of the member's GMP. For example, the member's pension at the date of death was £1000 per month, including £200 pm GMP. There is a DBLSDB payable, which is calculated as 5 x the member's pension at date of death. The calculation of the DBLSDB can include the value of the member's GMP as long as the scheme still meets its obligation of paying the spouse the spouses GMP.
Annuity Protection Lump Sum Death Benefit for Lifetime Annuities and Pension Protection Lump Sum Death Benefit for Scheme Pensions
A pension protection lump sum death benefit may be provided under a defined benefit arrangement if chosen when a member first becomes entitled to a scheme pension.
An annuity protection lump sum death benefit may be provided under a money purchase arrangement if chosen when a member first becomes entitled to a scheme pension or a lifetime annuity.
If chosen as part of the pension/annuity purchased at the point of vesting, the scheme (or insurance company) will pay a pension/annuity protection lump sum death benefit if the member has not at the time of death received a certain aggregate level of payments from the scheme / annuity providing that, if the lump sum is being paid under a defined benefit arrangement, the member has specified that the payment should be treated as a pension protection lump sum death benefit (rather than a defined benefits lump sum death benefit).
The maximum pension or annuity protection that can be provided is;
minus
An annuity protection lump sum death benefit/pension protection lump sum death benefit is liable to tax at the rate of 55% on the payment made (called the special lump sum death benefit charge). The liability for the payment of this tax lies with the scheme administrator who deducts it from the payment. This tax is a free-standing charge and cannot be offset against any tax allowance.
The Pension Benefits (Insurance Company Liable as Scheme Administrator) Regulations 2006
Uncrystallised Funds Lump Sum Death Benefit
An uncrystallised funds lump sum death benefit can only be paid from a money purchase arrangement where uncrystallised funds are held in the arrangement at the time the member died.
It must be paid within 2 years of the date the scheme administrators could reasonably have known of the member's death. If the payment is later than this, it is an unauthorised payment and taxable as such.
If the benefit payable is based on a formula/factor (e.g. multiple of the individual's salary or multiple of service) this is normally classed as a defined benefits lump sum death benefit, not an uncrystallised funds lump sum death benefit.
The maximum amount of an uncrystallised funds lump sum death benefit must be no more than the value of the uncrystallised funds (that were held in the arrangement when the member died) at the date the payment is made. So no new funds could be added, but any investment growth between the death and the benefit payment is allowed.
The payment of an uncrystallised funds lump sum death benefit triggers a lifetime allowance test (BCE 7) with the amount crystallising being the amount actually paid where death is prior to age 75.
After age 75 there is no BCE but a tax charge of 55% would apply.
An uncrystallised lump sum death benefit is therefore tax-free as long as it is within the member's remaining lifetime allowance. Any part of the payment that is outside of the lifetime allowance is a chargeable amount and taxed at 55%.
The personal representatives are responsible for identifying whether a chargeable amount has arisen following the payment of a relevant lump sum death benefit. They only need to do this after the payment of the lump sum death benefit(s).
The personal representatives must be provided with the date of payment and amount of all relevant lump sum death benefit(s) paid within 3 months of the payment. In addition, the personal representatives may also request the percentage of the standard lifetime allowance that the member had crystallised to date, i.e. to enable them to calculate any charge due. This must be provided within 2 months of their request.
The personal representatives may request information regarding the member's previous benefit crystallisation events from the appropriate scheme administrator or insurance company. If this information is requested, the scheme administrator/insurance company is obliged to provide the date of the BCE and the percentage of the lifetime allowance within 2 months of the request.
Where the personal representatives identify a chargeable amount, they must report this to HMRC, who will then contact the scheme administrator to obtain details of the recipient in order to assess them for the chargeable amount (55% of the lump sum). The scheme administrator must provide the information requested within 30 days.
The Registered Pension Schemes (Provision of Information) Regulations 2006 - SI2006/567
The scheme administrator may need to include the payment on the Event Report where the total lump sum death benefit exceeds 50% of the standard lifetime allowance for the tax year the individual died in.
As mentioned above, if BCE 7 is the first BCE triggered after A day, then any pre A day pension in payment must be included when calculating the percentage of lifetime allowance already used up. The calculation is 25 x the pension in payment at the date of death.
Contracted Out Benefits
Protected Rights
From 6 April 2012 these ceased to exist so the death benefits payable have no special restrictions that used to exist. A schemes rules / documentation could however have restrictions depending on how there rules are framed.
GMP (MP scheme with GMP underpin)
The GMP would have been paid to the member as a pension at vesting and as such would not form part of the drawdown pension fund. If the member dies with a surviving spouse/civil partner, a spouse's GMP would become payable, which could, potentially, be commuted for either a trivial commutation LSDB or a winding up LSDB. If the member dies with no surviving spouse, then there is no requirement to continue paying a GMP.
Trivial Commutation Lump Sum Death Benefit
Where a dependant of a member becomes entitled to an authorised pension death benefit and the amount of the pension is within the triviality limit the pension may be commuted and paid as a lump sum (including any contracted out benefits).
The payment is called a trivial commutation lump sum death benefit.
It can be paid from any form of arrangement but such a payment may only be paid to a dependant entitled to a pension death benefit in respect of the member and may only be made where the payment extinguishes all the dependants' entitlement to any form of authorised death benefits under the pension scheme.
To be a trivial commutation lump sum death benefit the level of payment must not be more than £18,000. Prior to 6 April 2012 the measure was 1% of the standard lifetime allowance, however, when this was reduced to £1.5 million the amount was fixed at £18,000.
A trivial commutation lump sum death benefit is taxable as pension income on the dependant receiving the payment i.e. through PAYE.
As this lump sum is in respect of the trivial commutation of the dependant's benefits, the recipient can only be the dependant.
Paying a Trivial Commutation LSDB along with other death benefits
It is possible for another type of death lump sum to be paid alongside the trivial commutation lump sum death benefit. The key point is that the trivial lump sum must be paid last as it is required to extinguish all dependants benefits entitlement under the scheme.
Charity Lump Sum Death Benefit
A charity lump sum death benefit is, as it suggests a lump sum paid to a charity on the member or dependants' death.
The conditions for payment are:
Where the drawdown pension fund is a dependants' drawdown fund the conditions are:
The maximum amount of charity lump sum death benefit must be no more than the value of the arrangement at the time of the payment.
A charity lump sum death benefit is paid tax-free however if not used for charitable purposes the payment is treated as an unauthorised payment.
Nominations
The member can nominate the charity to which the payment is made.
The member can make a number of nominations depending on the circumstances that exist at the time of their death. If there is a dependant alive at the time of the member's death, the remaining funds must be used to provide that dependant with a pension death benefit, but the member can still nominate in advance what happens to any remaining funds if that dependant then dies. Where the member does not nominate, or the member's nomination becomes void (e.g. the charity ceases to exist) the dependant can nominate, but the dependant cannot override a member's nomination.
The Scheme Administrator cannot nominate that a charity lump sum death benefit is paid.
Charities
The charity must be one that is registered with the Charity Commission for England & Wales or their Scottish or Northern Ireland counter-parts and they must use the payment for charitable purposes.
Their websites are respectively:
Winding-Up Lump Sum Death Benefit
Where a scheme providing the dependants' death benefit is being wound-up, any trivial pension benefits in existence can be fully commuted and paid as a winding-up lump sum death benefit, including any contracted out benefits. This applies whether or not the dependants' pension is in payment and regardless of the age of the deceased member.
The level of payment is limited to £18,000 on the date the lump sum is paid and must extinguish all of the dependant's entitlement to rights under the scheme. There is no aggregation with any other benefits - only benefits within the scheme are included.
The registered pension scheme making the payment must be in the process of winding up.
A winding-up lump sum is taxed as earnings on the recipient under PAYE either on an emergency Month 1 or Week 1 basis.
Contracted Out Benefits
A spouse's PR annuity or spouse's GMP may be commuted for a winding up lump sum death benefit, providing the total spouse's benefits fully meet the 'winding up' criteria. i.e. you can't just commute the spouse's PR and provide a spouse's annuity from the non PR fund and vice versa - the entire spouse's pension & lump sum entitlement must be commuted.
The Personal and Occupational Pension Schemes (Protected Rights) Regulations 1996
SI 1996/1537 Reg 8(1B)
Pt 3 s168 and Sch 29 Pt2 Finance Act 2004 as amended
Death benefits and the Lifetime Allowance
A payment made on the death of a member is made 'in respect' of that member. So any checks for lifetime allowance (LTA) purposes are against the member, not the recipient.
Death benefits paid as pension to dependants don't count towards the member's or the dependant's LTA.
Some lump sum death benefits:
even when paid to dependants, are counted against the member's LTA.
As such, if the lump sum death benefit is over the standard or protected LTA there may be scope for the excess to be used for a dependant's pension, to minimise any LTA charge.
ExampleThe member died in August 2011 when his personal pension plan was valued at £2,000,000. He had no protection for his pension benefits. Had the entire plan been taken as a lump sum there would have been tax of 55% on £200,000, the amount in excess of the standard Lifetime Allowance of £1,800,000. By taking a lump sum up to £1,800,000 and purchasing a dependants annuity for the balance the LTA tax charge is avoided. Lump sum death benefits can be paid to more than one dependant. But, even if the benefit is split to a number of beneficiaries, the total lump death benefit to all the beneficiaries still needs to be checked against the LTA. Pt4 Chapter 5 s214 onwards, Finance Act 2004 as amended |
Planning For Death
It is important from a planning perspective to ensure that the benefits available from scheme are known, as the availability of different types of benefits will allow benefits to be drawn in as tax efficient manner as possible.
Additionally, the Inheritance Tax impact of substantial death benefits in the recipient's bank account should not be overlooked, see our Pensions and Inheritance Tax planning article.
