RPSM09108030 - Technical Pages: Member benefits: Payments covered by Regulations: Arrears of pension paid after death

Arrears of pension paid after death

[Reg 16 of the Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171]

Background

To understand the means by which pensions which do not start on time can still be authorised member payments (under the tax rules), it may be helpful to consider three scenarios:

1. If delays in becoming entitled to scheme pension (RPSM11102050) occur while a member is still alive, the ‘Arrears of Pension’ Regulations 2006 - SI 2006/614 (RPSM09100120) specify when pre-entitlement arrears may be authorised. (Only scheme pensions are covered by this provision since other kinds of pension provision do not present the same difficulty).

2. If a member dies during a delay in providing their pension, then two further possibilities can arise. The first of these can be illustrated with the following example: suppose such a member became actually entitled (according to the tax rules) to the payment of pension during their lifetime. And suppose they also became entitled to an arrear payment under SI 2006/614. In such an example, a back-payment of pension from the date of entitlement up to the time of their death is definitely due. Likewise, any arrear due under SI 2006/614 still has to be paid.

The first hurdle to authorising such a payment would seem to arise with pension rule 2 in s165 FA04: taken literally, this would appear to prevent any payment (other than certain guarantees RPSM10104050), being made after death. However HMRC interprets pension rule 2 in s165 FA04 to be referring to payment in the context of accrual of pension after death. According to this interpretation, the rule does not prevent payment of amounts already accrued during the member’s lifetime. And indeed, the tax rules allow any assessment to income tax, to look back to the years in which the pension actually accrued rather than the date it was paid. In practice most recipients are happy to not re-open earlier years and simply accept PAYE taxation at the time of payment.

Typically, the payment would be made to the estate of the deceased (i.e. to their legal personal representative) as an authorised member payment using the P45 procedure - effectively taxing the pension arrear as the member’s own income.

3. The other possibility where a member dies during a delay in providing pension is that they die before fulfilling the formalities that are required to become entitled to the payment of that pension according to the tax rules. This does not mean that the scheme does not have some obligation to make some back-payments. However the tax rules put up the following hurdles to making the payment:

  • no entitlement to pension will have accrued under the tax rules before death,
  • further accrual is not possible after death, since there is no authorised pre-death pension that could continue under a guarantee,
  • no fresh entitlement to pension can arise for the member once they have died, and
  • the ‘Arrears of Pension’ Regulations (which hinge upon actual entitlement arising during the member’s lifetime), will not apply,

all of which mean that the payment looks set to be unauthorised. This is where regulation 16 of the ‘Authorised Payment’ Regulations SI 2009/1171 may help.

Regulation 16

This provides that an arrear of scheme pension paid to or in respect of the member, will be an authorised member payment so long as the following conditions are met:

  • the payment arises from a defined benefits arrangement,
  • the member had died before reaching age 75,
  • the member was at ‘arm’s length’ from any sponsoring employer of:
    • the scheme paying the arrear, and
    • any other scheme that is both an occupational pension scheme and a registered pension scheme, which relates to the same employment as the paying scheme relates to (any ‘related scheme’), and
  • where the member died before 6t h April 2006 -
    • the payment represents accrued arrears of pension,
    • the payment was allowed or required by the rules of the pension scheme as they stood immediately before the member died,
    • the existence of the relevant scheme rule(s) would not have prejudiced ‘former tax approval’ of the scheme,
  • where the member died on or after 6t h April 2006 -
    • the payment represents accrued arrears of pension, and the scheme administrator had not established the member’s entitlement to the pension (arrear) until after the member’s death,
    • the payment, had it been made immediately before the member’s death and had the member been entitled to it, would not have been an unauthorised payment, and
    • the scheme administrator could not reasonably have been expected to make the payment before the member’s death.

A member is said to be at ‘arm’s length’ from a sponsoring employer if that individual is:

  • not a ‘controlling director’ of a sponsoring employer (in relation to either the paying scheme or any related scheme), and
  • not ‘connected’ with a person who is a controlling director of a sponsoring employer (in relation to either the paying scheme or any related scheme).

A person is a ‘controlling director’ of a sponsoring employer if the person is a director of the company and is able to control 20% or more of the ordinary share capital of the company (as set out in section 417(5) (b) of the Income and Corporation Taxes Act 1988).

How a person is ‘connected’ with another person is set out in section 993 of the Income Tax Act 2007.

Whether ‘former tax approval’ would have been prejudiced is determined by reference to the IR12 (2001) (Practice Notes):

  • if the member died on or after 23r d March 2001, use the version of IR12 that was current on the date of death, or
  • if death occurred earlier, use the version of IR12 published on 23r d March 2001.

Limit on the member payment authorised by Regulation 16

Where the above conditions for Regulation 16 are met, it does not follow that all of the payment will be authorised. Only so much of the payment as represents arrears of pension accrued (without interest) during the period:

  • beginning with the earliest date from which the member could have required the scheme administrator to make the payment if the member had been entitled to it, and
  • ending with the member’s death,

is treated as an authorised member payment by virtue of this regulation.

BCE 9

If the member died on or after 6t h April 2006, so much of the payment as is authorised by regulation 16, will be a BCE 9 (see RPSM11104880 for further details including the effective timing of the BCE).


  Glossary (RPSM20000000)


Home | Main Contents | Manual Contents
Previous Page | Next Page | Top | Menu