RPSM09100173 - Technical Pages: Member benefits: Overview: Payments: Other transactions regarded as payments: Increase in rights of connected person on death

Increase in rights of connected person on death

Deaths on or after 6^th April 2006 but before 6^th April 2007

A registered pension scheme is treated as making an unauthorised payment where a member who has either

• uncrystallised rights, or
• an unsecured pension fund, or
• an alternatively secured pension fund 

dies and there is an increase in the rights of another member (the second member) of the scheme that is attributable to that death, where the dead member and the second member were connected immediately before the death.

Deaths on or after 6^th April 2007 but before 6^th April 2008

A registered pension scheme is treated as making an unauthorised payment where a member who has either

• uncrystallised rights, or
• an unsecured pension fund

dies and there is an increase in the rights of another member (the second member) of the scheme that is attributable to that death, where the dead member and the second member were connected immediately before the death.

(See RPSM09100176 about a member who dies with an alternatively secured pension fund and another member of the scheme becomes entitled to rights in relation to the deceased member’s rights.)

Deaths on or after 6^th April 2008

A registered pension scheme is treated as making an unauthorised payment where a member dies who has either

• uncrystallised rights, or
• rights to a scheme pension, or dependants’ scheme pension, provided by the scheme administrator or purchased from an insurance company selected by the scheme administrator with sums or assets held for the purposes of the pension scheme, or
• rights to a lifetime annuity, or dependants’ annuity, purchased with sums or assets held for the purpose of the scheme,
• an unsecured pension fund, where death occurred before 6 April 2011, or
• a drawdown pension fund, where death occurred on or after 6 April 2011

and there is an increase in the rights of another member (the second member) of the scheme attributable to that death, where the dead member and the second member were connected immediately before the death.

(See RPSM09100176 about a member who dies before 6 April 2011 with an alternatively secured pension fund and another member of the scheme becomes entitled to rights in relation to the deceased member’s rights.)

The amount by which the second member’s rights is regarded as increased as a result of the death is the difference between the amount that might have been received had the second member’s increased rights been assigned on an arm’s length basis and the amount that might have been received from such an assignment in respect of the second member’s rights immediately before they were increased. In both cases, for the purpose of establishing the amount that might be received by way of an assignment, any power to reduce the second member’s rights is ignored.

The following amounts are deducted from the amount by which the second member’s rights have increased:

• the amount of any transfer lump sum death benefit paid to the second member in respect of the deceased member(this deduction can apply in respect of deaths occurring on or after 6^th April 2006 but before 6^th April 2007 only),
• the value of any authorised pension death benefits or authorised lump sum death benefits to which the second member becomes entitled in respect of the deceased member,
• any amount prescribed by HMRC regulations. (There are no such regulations existing or currently planned).

The resulting figure is the amount of the deemed unauthorised payment.

The unauthorised payment is treated as being made to the member whose rights are increased - the second member - or that member’s personal representatives.

However, the scheme is not treated as making an unauthorised payment if

• the increase in the second member’s rights is brought about by an assignment (see RPSM09100170),
• at least 20 members in the scheme receive an increase in rights at the same rate in respect of the deceased member’s rights, or
• the increase in the second member’s rights
1. comprises an increase in the member’s rights under an existing dependants’ scheme pension, dependants’ annuity, dependants’ drawdown pension fund (where death occurred before 6 April 2011 unsecured pension fund or dependants’ alternatively secured pension fund) that the second member already had in respect of the deceased member and
2. that increase is attributable to rights of a third member, also in respect the deceased member, who has also died. However, where death occurred before 6 April 2011, this excludes increases attributable to rights the third member had representing a dependants’ alternatively secured pension fund in respect of the deceased member. An example of where this circumstance would apply is where member A dies and authorised pension death benefits are paid to dependants B and C (and D and so on). Dependant B dies and, as a consequence, the existing rights for dependant C (or C and D and so on) are increased but that increase is directly attributable to the death of member A.

References to the rights of a member (the deceased member or the second member) under the registered pension scheme include the right to receive

• a scheme pension or dependants’ scheme pension either provided directly by the scheme administrator or purchased from an insurance company with sums or assets held for the purposes of the pension scheme, or
• a lifetime annuity or dependants’ annuity that has been purchased from an insurance company with sums of assets held for the purposes of the pension scheme.

A connected person is defined in section 993 of ITA 2007

RPSM04104010 onwards has details of the tax charges in respect of unauthorised member payments.

Also, where a member, or a dependant, dies after reaching age 75 the scheme administrator may be liable to inheritance tax in relation to the member, or dependant.