RPSM03109030 - Technical Pages: Protecting pension rights from tax charges: Death benefits: Enhanced protection

Enhanced protection and death benefits

Under enhanced protection the impact of the funding for or payment of lump sum death benefits differs depending upon the type of arrangement.

Other money purchase arrangements

For other money purchase arrangements and some hybrid arrangements that become other money purchase arrangements the payment of a relevant contribution to the arrangement will cause the loss of enhanced protection.

Paragraph 14(3) and (4) Schedule 36 FA 2004 allows contributions to be made to an other money purchase arrangement or to a relevant hybrid arrangement without loss of enhanced protection where certain conditions are satisfied – see RPSM03109120. RPSM03109032 sets out the conditions that must be met for contributions to continue to be paid to an other money purchase arrangement. A relevant hybrid arrangement is an arrangement under an occupational pension scheme that becomes an other money purchase arrangement and the hybrid would have paid a lump sum death benefit if the individual had died on 5 April 2006.

Defined benefits and cash balance arrangements

For defined benefits and cash balance arrangements enhanced protection will be lost where the value of the lump sum death benefits paid (whether defined benefits lump sum death benefit or uncrystallised funds lump sum death benefit) exceed the available amount of the individual’s appropriate limit. ( RPSM03104525 explains what the appropriate limit is.)

Payment of the death benefits listed in RPSM03109010 will not cause loss of enhanced protection.

Paragraph 15A Schedule 36 FA 2004 allows the value of an individual’s appropriate limit to be increased (where appropriate) where a recipient of a lump sum notifies HMRC – see RPSM03109046. The appropriate limit will be increased if the current value of the individual’s ‘pre-commencement rights to death benefits’ relating to the employment is greater than the appropriate limit previously calculated in respect of pension rights relating to the employment – see RPSM03109120.

The current value of an individual’s ‘pre-commencement rights to death benefits’ relating to an employment is the amount of those rights as at 5 April 2006 increased to the greater of

• the lump sum amount increased by the amount of the relevant indexation percentage – see RPSM03104525 and,
• the lump sum amount derived from a re-calculation of the value of the rights as at 5 April 2006 using the individual’s earnings immediately before their death – see RPSM03104530. (This re-calculation is relevant only where the amount of the lump sum death benefit is a function of earnings.)

RPSM03109022 to RPSM03109026 explain how to determine the value of ‘pre-commencement rights to death benefits’ as at 5 April 2006. For the purposes of the re-calculation of the appropriate limit the individual’s ‘pre-commencement rights to death benefits’ will include only rights to lump sum death benefits on 5 April 2006 that would have been payable in respect of the pensionable employment to which the defined benefits and/or cash balance arrangements relate.