RPSM10105510 - Technical Pages: Death benefits: Lump sums pre 6 April 2011: Member dies before or after age 75: Winding-up lump sum death benefit

This guidance only covers the position where the member died before 6 April 2011. If the member died on or after 6 April 2011 see RPSM10106000.

A winding-up lump sum death benefit

A dependant’s entitlement under a registered pension scheme may normally only be commuted on the basis it is trivial in value where the member has died before reaching their 75^th birthday (see RPSM10105260).

Where the scheme providing the dependant’s death benefit is being wound-up any trivial pension benefits in existence at that time may be fully commuted in this way and paid as a winding-up lump sum death benefit. This applies whether or not the dependant’s entitlement is in payment.

The legislation limits the level of payment to 1% of the standard lifetime allowance on the date the lump sum is paid, i.e. £15,000 for the 2006/07 tax year. Any excess payment made beyond this level is not a winding-up lump sum death benefit.

Definition

A lump sum payment is only a winding-up lump sum death benefit if

• the registered pension scheme making the payment is being wound-up,
• it is paid to a dependant entitled under the scheme to pension death benefit in respect of the member, and
• it extinguishes the dependant’s entitlement under the pension scheme to a pension death benefit and lump sum death benefit in respect of the member.

Any amount paid over and above the 1% of standard lifetime allowance measure will not be a winding-up lump sum death benefit.

Taxation

A winding-up lump sum death benefit is taxable as pension income on the recipient of the dependant receiving the payment - see RPSM04101140.

Other issues

The wind-up of a registered pension scheme must be reported to HMRC using the Event Report ‘form’.