If a death benefit lump sum is not paid within 2 years of when we could first reasonably have been expected to know of the member’s death, it may be liable for tax.
See the HMRC websitefor more information about ‘taxable authorised’ payments from pension schemes.
Lifetime Allowance (LTA) is the total value of pension benefits that an individual can take from all pension arrangements (excluding State benefits) before incurring a tax charge. This could include:
a pension being paid
a pension lump sum
a death benefit lump sum after the death of a pension member
any lump sum payments made when a pension member dies in service or before they become a pensioner
Most people will have a standard LTA of 100%, but an individual may have a higher LTA if they have applied to HMRC for an enhanced LTA. See HMRC’s website for more information.
If a member with a deferred pension dies before their pension comes into payment, or shortly after their pension comes into payment, we will pay the balance of pension due to be paid during the guarantee period. This is called a pension guarantee payment.
Pension guarantee payments normally count against the member’s LTA, unless the member had elected for it to be treated as a pension protection lump sum death benefit.
If a pension protection lump sum death benefit is paid, the pension scheme will deduct tax at a rate of 45% (unless the deceased member was under age 75 at the date of death) but the lump sum will not count against the member’s LTA.
If the pension guarantee payment relates to a pension that was already in payment on 05 April 2006, then no tax is payable.
The member’s personal representative is responsible for determining the LTA tax position. Any LTA tax due is payable by the recipient of a lump sum payment and will be collected from them by HMRC.
What a personal representative must do
If you are making a claim as a deceased member’s personal representative, you will need to contact any pension schemes that the member belonged to or was receiving a pension from.
The pension scheme administrator will tell you the date and amount of any lump sum benefit paid that will count towards the member’s LTA. They will also tell you how much of the LTA the lump sum has used. The scheme administrator must provide you with this information within three months of the payment.
If a pension scheme pays a lump sum on the death of the scheme member that counts towards the member’s LTA, you will need to find out how much LTA the member had already used up (in total). You can get this information from the member’s pension scheme(s) and they should provide this information within two months from when you requested it.
If the member’s remaining LTA is insufficient to cover payment of any lump sum(s), you must notify HMRC and give them details of the lump sum(s) paid, the scheme(s) that made the payment(s), and the amount on which the LTA tax charge is payable.
Tax rules for members who die aged over 75
Tax rules prevent us from paying a death benefit lump sum for members aged 75 or over at the date of death (unless they were already receiving a pension on 05 April 2006).
If a pension guarantee payment is due on the member’s death, we cannot pay this as a lump sum. Instead, we will continue to pay an annual pension – for the rest of the guarantee period – to the person or people nominated to receive the lump sum. We will make these pension payments annually in advance. See HMRC’s website for more information.