RPSM03109044 - Technical Pages: Protecting pension rights from tax charges: Death benefits: Enhanced protection example

Enhanced protection and death benefits - an example of the payment of a sequence of lump sum death benefits

Tom has uncrystallised pension rights in four arrangements relating to the same employment. The arrangements are held under separate schemes (A, B, C and D). Tom has enhanced protection when he dies. Each arrangement pays a single lump sum death benefit.

The lump sums are paid in the following sequence:

Scheme A pays an uncrystallised funds lump sum death benefit from an other money purchase arrangement - enhanced protection is retained.

Scheme B pays an uncrystallised funds lump sum death benefit from a cash balance arrangement - the amount of the lump sum does not exceed the available amount of the ‘appropriate limit’ - enhanced protection is retained.

Scheme C pays a defined benefits lump sum death benefit from a defined benefits arrangement - the amount of the lump sum exceeds the available amount of the ‘appropriate limit’ so the payment triggers the loss of enhanced protection. A lifetime allowance charge will apply to that part of the lump sum that exceeds the deceased member’s available lifetime allowance.

Scheme D pays an uncrystallised funds lump sum death benefit from an other money purchase arrangement. Enhanced protection has already been lost and a lifetime allowance charge will apply to that part of the lump sum that exceeds the deceased member’s available lifetime allowance.

The usual ‘rules’ for enhanced protection apply to these payments. The lump sums paid from schemes A and B were paid whilst enhanced protection was in force. These lump sums are not subject to a lifetime allowance charge.

The subsequent loss of enhanced protection means that the lump sums paid from schemes C and D are potentially liable to the lifetime allowance charge. If part or all of the lump sum from the scheme C is liable to the lifetime allowance charge s271(3) and (4) FA 2004 will apply to determine the amount of tax due.

As the example shows the order in which lump sum death benefits are paid may be significant in determining whether or not they are potentially liable to a lifetime allowance charge.