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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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The taxation of pension income: Pensions taken as flexible drawdown: temporary non-residence: an overview

Note: This guidance covers the taxation of amounts taken as flexible drawdown whether it is taken under a registered pension scheme or under an overseas pension scheme. See RPSM09103590 onwards for more information about flexible drawdown.

From 6 April 2011 an individual with pension savings held in a money purchase arrangement (other than a cash balance arrangement) in either a registered pension scheme or an overseas pension scheme (where the funds concerned have benefitted from UK tax relief) is able to withdraw those savings in their entirety as “flexible drawdown” pension income subject to meeting certain conditions. These conditions are that:

a. the individual has reached age 55 (normal minimum pension age) or an earlier age where the member is in ill-health (see RPSM08100070 for more detail) or has a protected pension age (see RPSM03106000 for more detail), and

b. the individual has other pensions in payment of at least £20,000 (see RPSM09103600 for more detail), and

c. no relevant contributions are paid by or on behalf of, or in respect of, the individual, in the tax year in which the declaration (see next) is made, to any registered pension scheme under which there is a money purchase arrangement (other than a cash balance arrangement) relating to the member, and at the time of the declaration (see next) the member is not an active member of any registered pension scheme under which there is a defined benefits or cash balance arrangement relating to the member, and

d. the individual makes a valid declaration (see RPSM09103610) to the scheme administrator of the pension scheme from which they wish to take flexible drawdown and the scheme administrator accepts that declaration.

Where a UK resident individual takes flexible drawdown from a registered pension scheme, they can broadly receive a tax-free lump sum equal to 1/3rd of the value of the sums and assets used to provide flexible drawdown. Any amount taken as flexible drawdown is taxable in the year of receipt as pension income, under s.579A ITEPA 2003, at the individual’s marginal rate (see EIM74014).

To prevent the possibility of someone avoiding tax by becoming temporarily non-resident for one full tax year or more and in that period taking flexible drawdown from a registered pension scheme or from an overseas pension scheme, FA 2011 introduced sections 576A and 579CA ITEPA 2003. From 6 April 2011, and subject to certain conditions, flexible drawdown paid whilst an individual is temporarily non-resident in the UK is treated as pension income arising to the individual in the tax year they resume residence in the UK.