RPSM04101110 - Technical Pages: Taxation: Authorised member payments: Taxable lump sum death benefits

Taxable lump sum death benefits

[s206 & 273A] [The Pension Benefits (Insurance Company Liable as Scheme Administrator) Regulations 2006 - SI 2006/136] 

A free-standing tax charge called the special lump sum death benefits charge is triggered when any of the following lump sum payments are made,

• a pension protection lump sum death benefit, see RPSM10106040 (or if the member died before 6 April 2011 RPSM10105150),
• an annuity protection lump sum death benefit, see RPSM10106050 (or if the member died before 6 April 2011 RPSM10105160),
• a drawdown pension fund lump sum death benefit, see RPSM10106060 (or if the member died before 6 April 2011 RPSM10105230),
• a defined benefits lump sum death benefit paid in respect of a member who was aged 75 or over when they died, see RPSM10106020,
• an uncrystallised funds lump sum death benefit paid in respect of a member who was aged 75 or over when they died, see RPSM10106030.

The person liable to the special lump sum death benefits charge is the scheme administrator of the registered pension scheme making any of the above lump sum payments. However, where an insurance company makes any of these payments under an annuity or insurance contract which is not, in itself, a registered pension scheme but where the payment is treated as made by a registered pension scheme because the contract was acquired with funds held by such a scheme, the insurance company will be the liable person. In effect, the insurance company becomes the scheme administrator for the purposes of the particular special lump sum death benefits charge liability in question.

The tax charge applies whether or not the scheme administrator or the person receiving the lump sum death benefit is resident, ordinarily resident or domiciled in the UK.

The rate of tax for the special lump sum death benefits charge depends on when the individual’s death triggering the lump sum payment occurred.

If the individual died before 6 April 2011 the tax rate is 35%

If the individual died on or after 6 April 2011 the tax rate is 55%.

Scheme administrators may deduct the tax from the lump sum death benefit before making the payment to the member where the rules of the scheme making the payment allow this. The tax charge applies to the gross amount of the lump sum before the deduction of the tax.

It is the scheme administrator who is liable to the tax charge and not the person who receives the lump sum payment. So if the recipient is a non-taxpayer they cannot make any repayment claim in respect of the tax paid. There is no further tax due for the person who receives the lump sum payment, even if they are a higher rate taxpayer.