PTM073100 - Death benefits: lump sums: defined benefits lump sum death benefit
As of 6 April 2024 there is no longer lifetime allowance. If you are looking for information about protections, enhancement factors and the lifetime allowance charge please see these pages on The National Archives. If you are looking for information about the principles of lifetime allowance and benefit crystallisation events please see these pages of The National Archives.
Glossary PTM000001
Definition of a defined benefits lump sum death benefit
Who can receive a defined benefits lump sum death benefit
Amount that can be paid as a defined benefits lump sum death benefit
Taxation of a defined benefits lump sum death benefit
Definition of a defined benefits lump sum death benefit
Paragraph 13 Schedule 29 Finance Act 2004
Broadly, a defined benefits lump sum death benefit is a lump sum that is paid from a defined benefits arrangement following the death of a member. A common example of this type of lump sum is where a member dies whilst still in employment and their pension scheme pays out a lump sum of a multiple of their salary following their death, e.g. 4 times salary.
The payment conditions for a defined benefits lump sum death benefit are that it is paid from a defined benefits arrangement and is not:
- a pension protection lump sum death benefit,
- a trivial commutation lump sum death benefit, or
- a winding-up lump sum death benefit.
For payments made before 6 April 2016 there is an extra payment condition. Lump sums paid in respect of a member aged under 75 when they died must be paid within two years of the earlier of the following dates:
- the date the scheme administrator first knew of the member’s death, or
- the date the scheme administrator could reasonably have been expected to know of the member’s death.
Where the lump sum was paid before 6 April 2016 in respect of a member aged under 75 when they died and it wasn’t paid within the two year period, the payment is not a defined benefits lump sum death benefit. It is an unauthorised member payments and should be taxed as such (see PTM131000).
These are the payment conditions for lump sums paid in respect of someone who died on or after 6 April 2011. For guidance relating to payments made in respect of a member who died before 6 April 2011 see RPSM10105110 on the National Archives website.
Who can receive a defined benefits lump sum death benefit
The tax rules do not set any conditions on who can be paid this type of lump sum. However the rules of the pension scheme may set limits on who it will pay this type of benefit to.
Amount that can be paid as a defined benefits lump sum death benefit
The tax rules do not set a limit on how much can be paid as a defined benefits lump sum death benefit. However the rules of the pension scheme may set a limit on how much it will pay out.
Taxation of a defined benefits lump sum death benefit
Payments made on or after 6 April 2016
Section 206 Finance Act 2004
Sections 579A, 637H, 637S Income Tax (Earnings and Pensions) Act 2003
The tax treatment of the lump sum paid on or after 6 April 2016 depends on how old the member was when they died, how long it takes to pay the lump sum and who receives the payment.
If the member was under 75 when they died and the lump sum is paid within two years of:
- the date the scheme administrator first knew of the member’s death, or
- if earlier, the date they could first reasonably have been expected to know of it
the lump sum will be tax free unless the payment exceeds the deceased member’s lump sum and death benefit allowance.
The defined benefits lump sum death benefit is a "relevant lump sum death benefit" and is tested against the lump sum and death benefit allowance. The amount of the lump sum that exceeds the deceased member's available allowance will be taxed as pension income at the recipient's marginal rate.
The defined benefits lump sum death benefit is taxable if:
- the member (or dependant) was 75 or older when they died, or
- the lump sum was not paid within the two year payment period shown above.
Whether the taxable lump sum payment is:
- taxable as income of the recipient, or
- subject to the special lump sum death benefits charge
depends on whether or not the lump sum is paid to a ‘non-qualifying person’. Payments to a ‘non-qualifying person' are subject to the special lump sum death benefits charge.
Go to PTM073010 for more detailed information on the tax treatment of lump sum death benefits, including the lump sum and death benefit allowance and the definition of a ‘non-qualifying person’.