Death benefits from a defined benefit pension scheme

By Tolley
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The following Employment Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Death benefits from a defined benefit pension scheme
  • Introduction
  • Lump sum death benefits ― before benefits have been crystallised
  • Lump sum death benefits ― after benefits have been crystallised
  • Dependants’ pensions
  • Trivial commutation lump sum death benefit

Introduction

On the death of a scheme member or a beneficiary, a registered pension scheme is only authorised to pay out benefits to a beneficiary either as a pension death benefit or as a lump sum death benefit.

The type of benefits paid will depend on the scheme rules and the type of arrangement from which the benefits are being paid.

As with the payment of benefits in a member’s lifetime, the legislation sets out the authorised forms of pension and lump sum death benefits that may be paid following a member’s death, the circumstances in which those benefits can be paid, and the conditions and restrictions that the payments of the benefits must meet or follow in order for them to be authorised.

These are referred to in the legislation as ‘the pension death benefit rules’ and ‘the lump sum death benefit rules’.

Lump sum death benefits ― before benefits have been crystallised

Where a member of a defined benefit scheme dies before taking benefits, a lump sum death benefit of a set monetary amount or, as a multiple of salary, may be paid: a ‘defined benefits lump sum death benefit’.

There is no limit to the amount of the defined benefits lump sum death benefit that can be paid from a scheme, but it will be tested against the (deceased) member’s lifetime allowance. Schemes may promise to pay a set amount of money on death or a lump sum death benefit linked to the salary of the member, or by some other measure. It is entirely a matter for the scheme to decide.

A defined benefits lump sum death benefit should be paid within two years of the date the member died. Until 5 April 2016, if it was paid later then it was no longer a defined benefits lump sum death

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