RPSM03107020 - Technical Pages: Protecting pension rights from tax charges: Lump sum death benefit guarantees: Protection

Protection of Guarantee

Some retirement benefits schemes and deferred annuity contracts (section 32 policies) provide 5 year guarantees for the pensions and lifetime annuities paid to members. Under the guarantee, if the member dies within 5 years of the commencement of the pension or lifetime annuity, a lump sum death benefit is paid. The lump sum is equal to the value of the pension or annuity instalments which would have been paid to the member during the remainder of the 5 year period.

An individual who is a member of an approved retirement benefit scheme on 5 April 2006 and who is in receipt of a pre-commencement pension which had a 5 year guarantee attached will receive protection from the post 5 April 2006 rules.

Where the member dies whether before or after the age of 75, and before the end of the guarantee period a lump sum may be paid as

• a pension protection lump sum death benefit,
• an annuity protection lump sum death benefit or
• an unsecured pension fund lump sum death benefit,

as applicable.

Additionally, this protection will disapply the special lump sum death benefits charge under section 206, Finance Act 2004 for those who die before age 75 where the lump sum paid does not exceed the ’protection limit’.

The protection limit is the difference between

• the amount of pension or annuity that the member would have been entitled to if they had lived until the expiry of the guarantee period, and
• the amount of any pension protection, lump sum death benefit or any annuity protection lump sum death benefit or unsecured pension fund lump sum death benefit previously paid in respect of that pension.

The special lump sum death benefits charge will not apply if the individual dies after having reached the age of 75 and before the end of the five year guarantee period.

RPSM10105530 to RPSM10105550 also provide information on this benefit payment.