RPSM03307040 - Scheme Administrator Pages: Protecting pension rights from tax charges: Benefit payments – other forms of protection: 5 year pension guarantees

Protection concerning pensions under a 5 year guarantee

Before 6 April 2006 a pension paid from a retirement benefits scheme or deferred annuity contract (section 32 policy) could be guaranteed for 5 years. If the member died within 5 years of the start of the pension the amount of the guarantee could be paid as a lump sum.

From 6 April 2006 where a pension is guaranteed the amount of the guarantee cannot be paid as a lump sum; the pension must continue to be paid until the end of the guarantee period. Instead of, or in addition to, a pension guarantee a lump sum death benefit may be paid after pension benefits have come into payment. These lump sum death benefits are taxable being liable to a special lump sum death benefits charge.

Where a member in receipt of a pension with a 5 year guarantee on 5 April 2006 dies within 5 years of the start of that pension the guaranteed amount can still be paid out as a lump sum.

If the member is under 75 when they die the special lump sum death benefits charge will not apply where the amount of the lump sum paid is not more than 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, annuity protection lump sum death benefit or unsecured pension fund lump sum death benefit previously paid in respect of that pension.

Where the member dies age 75 or over the special lump sum death benefits charge will not apply. The payment of the lump sum in respect of a member’s death age 75 or over needs to be reported to HMRC on the Event Report – see RPSM12301190.

RPSM10105530 to RPSM10105550 provide more information on this benefit payment.