RPSM10106060 - Technical pages: death benefits: lump sums from 6 April 2011: drawdown pension fund lump sum death benefit

What is a drawdown pension fund lump sum death benefit?
When can a drawdown pension fund lump sum death benefit be paid?
Who can be paid a drawdown pension fund lump sum death benefit?
How much can be paid as a drawdown pension fund lump sum death benefit?
Is a drawdown pension fund lump sum death benefit tested against the lifetime allowance?
How is a drawdown pension fund lump sum death benefit taxed?
Is Inheritance Tax due on payment of a drawdown pension fund lump sum death benefit?

What is a drawdown pension fund lump sum death benefit?

[Paragraph 17 Schedule 29]  

If a member receiving a drawdown pension (or a dependant getting a dependant’s drawdown pension) that is not a short term annuity dies, the remainder of the fund may be paid out as a lump sum. Broadly this is a drawdown pension fund lump sum death benefit.

This payment was previously called an unsecured pension fund lump sum death benefit.

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When can a drawdown pension fund lump sum death benefit be paid?

[Paragraph 17 Schedule 29]  

If the member (or dependant) died on or after 6 April 2011 the lump sum can be paid whatever the age of the member (or dependant) when they died. There is no time limit for the payment of this lump sum. However, once funds have been effectively designated for the payment of a dependant’s drawdown pension, it is not possible to then reverse that designation. So the original decision cannot be reversed to allow a drawdown pension fund lump sum death benefit to be paid instead of a pension.

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Who can be paid a drawdown pension fund lump sum death benefit?

The tax rules do not set any conditions on who can be paid this type of lump sum. However the rules of your pension scheme may set limits on who it will pay this type of benefit to.

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How much can be paid as a drawdown pension fund lump sum death benefit?

[Paragraph 17(3) and (4) Schedule 29]

A drawdown pension fund lump sum death benefit cannot be more than the value of the drawdown pension fund held in the arrangement when the member died, at the point of the lump sum payment. Where the lump sum is paid in respect of a dependant it cannot be more than the value of the dependant’s drawdown pension fund when the dependant died at the point the lump sum is paid. Any growth of that drawdown pension fund (or dependants drawdown pension fund) up to the point of payment may be covered in the payment. This limit is referred to in the legislation as the permitted maximum.

Any amount paid beyond this amount is not a drawdown pension fund lump sum death benefit.

The definition of drawdown pension fund excludes any amount that may have been used to buy a short-term annuity. The legislation only covers the payment of the residual unsecured pension fund held in the arrangement. The only payment that may be made from a short-term annuity contract following the death of the annuitant is any continuing annuity payments under any term-certain guarantee attached to the contract.

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Is a drawdown pension fund lump sum death benefit tested against the lifetime allowance?

No.

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How is a drawdown pension fund lump sum death benefit taxed?

[Section 206]  

The special lump sum death benefits charge is due on the payment of this lump sum. The scheme administrator is responsible for paying this tax charge. The person who received the lump sum is not liable to this tax charge. The scheme administrator can deduct the tax due before paying the lump sum.

Where the member (or dependant) died before 6 April 2011 the rate of the tax charge is 35 per cent.

Where the member (or dependant) died on or after 6 April 2011 the rate of the tax charge is 55 per cent.

The scheme administrator should pay the tax due using the accounting for tax (AFT) return procedure. Guidance on when and how to file the accounting for tax return can be found in the Registered Pension Schemes Manual at RPSM12301300.

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Is Inheritance Tax due on payment of a drawdown pension fund lump sum death benefit?

Inheritance Tax will not apply if the lump sum is paid at the discretion of the pension scheme trustees (or provider). The Inheritance Tax charges that arose before 6 April 2011 on alternatively secured pension funds left over on death no longer apply. Similarly, the Inheritance Tax charges that may have arisen when a person chose not to take any benefits from their scheme no longer apply. More information can be found in the Inheritance Tax Manual at IHTM17000.

  Glossary (RPSM20000000)