RPSM10105440 - Technical Pages: Death benefits: Lump sums pre 6 April 2011: Member dies aged 75 or over: Life cover lump sum

A life cover lump sum

[s168(1), para 21A Schedule 29 & Regs 6 to 8 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572] 

What is a life cover lump sum

A life cover lump sum can only be paid where the member is age 75 or over when they die. It is a lump sum that could have been paid under a scheme approved under Chapter 1 Part 14 Income and Corporation Taxes Act (ICTA) 1988 before 6 April 2006.

This provision allows certain lump sums, e.g. small lump sums known as funeral expenses or funeral grants, which were paid from occupational pension schemes, to continue to be paid after 5 April 2006.

How is a life cover lump sum taxed?

A life cover lump sum can only be paid after age 75 so its payment is not a benefit crystallisation event and does not count for the purposes of the lifetime allowance. There is no income tax charge on a life cover lump sum.

Conditions for payment

A registered pension scheme may only pay a life cover lump sum where all the following conditions are met. The conditions are that

• the scheme was a retirement benefits scheme approved for the purposes of Chapter 1 Part 14 ICTA 1988 immediately before 6 April 2006,
• the member was in receipt of benefits from the scheme on or before 5 April 2006 or was entitled to one or more life cover lump sums which in aggregate amount to £2,500 or less,
• the member had a right under the scheme to a life cover lump sum on 5 April 2006
• on 10 December 2003 the rules of the scheme contained a provision that

• • gave the member the right to a life cover lump sum at that point, or
  • would have given the individual the right to a life cover lump sum if they had been a member of the scheme at that point, and

• the rules of the scheme in relation to life cover lump sums have not changed since 10 December 2003.