EIM75660 - The taxation of pension income: drawdown pension paid to a dependent, nominee or successor
Overview
Dependants, nominees and successors
What is a drawdown pension
Nominees’ or dependants’ drawdown pension
Successors’ drawdown pension
Taxable amount of pension
Overview
This guidance page relates to drawdown pension to a beneficiary (that is a dependant, nominee or a successor) from:
- a registered pension scheme
- an overseas pension scheme
- a relevant non-UK scheme (RNUKS).
EIM75600 provides guidance on the meaning of the terms ‘overseas pension scheme’ and ‘relevant non-UK scheme’ (RNUKS).
Any drawdown pension paid before 6 April 2015 is taxable as pension income.
Any drawdown pension paid in respect of the death of a member or beneficiary aged 75 or older is taxable.
Drawdown pension payments made on or after 6 April 2015 in in respect of a member or beneficiary who died aged under 75 may be taxable or it may be tax-free. The conditions for tax-free payment vary depending on the type of drawdown pension payment.
To work out the correct tax treatment for payments, identify:
- the type of person receiving the pension (dependant, nominee, successor or other)
- the type of pension scheme paying the drawdown pension (registered pension scheme, overseas pension scheme, RNUKS or other)
- the type of pension by reference to the rules for authorised pension payments made by a registered pension scheme.
Dependants, nominees and successors
The term ‘dependant’ includes a member’s spouse, civil partner and children aged under 23. PTM071200 provides full details of who can be a dependant.
Broadly a nominee is someone who is not a dependant but who has been nominated by the member to receive benefits from the scheme following the member’s death.
A successor is someone who has been nominated by a dependant, nominee or a previous successor (the beneficiary) to receive benefits from the scheme following the beneficiary’s death.
PTM071200 provides guidance on the full meaning of the term ‘dependant’. PTM071300 provides detailed guidance on the meaning of the terms ‘nominee’ and ‘successor’.
What is a drawdown pension
The beneficiary starts drawdown pension by designating pension scheme funds as available to provide them with a drawdown pension. Where the beneficiary is a:
- dependant the pension is known as a dependants’ drawdown pension
- nominee the pension is called a nominees’ drawdown pension
- successor the pension is a successors’ drawdown pension.
Beneficiaries’ drawdown pension may be paid as ‘income withdrawal’ or ‘short-term annuity’.
PTM072410 and PTM072420 give more information about beneficiaries’ drawdown pension and short-term annuities.
It is important to note that the conditions for tax-free payments from 6 April 2015 vary depending on whether the drawdown pension is paid as income withdrawal or short-term annuity.
Income withdrawal
Income withdrawal is a payment made directly from the beneficiary’s drawdown fund. Subject to what the pension scheme rules allow, the beneficiary can choose to take as much or as little drawdown pension as they like. They can choose to take any of the following:
- no payment of drawdown pension
- a regular series of payments
- an irregular payment stream
- their whole flexi-access drawdown fund as a single payment.
Short-term annuity
A short-term annuity is payable by an insurance company under an annuity contract purchased using funds from the beneficiary’s drawdown fund. The contract pays the annuity for a maximum period of 5 years.
Nominees’ or dependants’ drawdown pension
Sections 579A and 579CZA/573 and 574(1)(ba) ITEPA 2003
A dependants’ or nominees’ drawdown pension is taken when they designate either or both of remaining drawdown funds (where the member had drawdown pension) and uncrystallised funds (funds that have not yet been put aside or used to provide benefits) to provide them with a drawdown pension.
Taxable drawdown pension
Before 6 April 2015 payment of a dependants’ drawdown pension was taxable as pension income of the dependant. A nominees’ drawdown pension could not be paid before 6 April 2015.
From 6 April 2015 a dependants’ or nominees’ annuity is taxable if it is payable in respect of a member who:
- died aged 75 or older
- if paid as a short-term annuity – died before 3 December 2014 at any age
- died aged under 75 and the conditions for tax-free payment are not met
Tax-free drawdown pension
Sections 579A and 579CZA(1) and (6)/573 and 574(1)(ba) ITEPA 2003
The conditions for tax-free payment of drawdown vary depending on whether the drawdown pension is paid as income withdrawal or short-term annuity. The main difference is that a short-term annuity can only be tax-free if it is paid in respect of a member who died on or after 3 December 2014.
EIM75640 explains the conditions that must be satisfied for a nominees’ or dependants’ drawdown pension taken as a short-term annuity to be tax-free. See the sections ‘Tax-free nominees’ annuity purchased using funds from a nominee’s flexi-access drawdown fund’ and ‘Tax-free dependants’ annuity purchased using funds from a dependant’s drawdown fund’.
This section of guidance explains the conditions that must be satisfied for a nominees’ or dependants’ drawdown pension taken as ‘income withdrawal’ to be tax-free.
A nominees’ or dependants’ drawdown pension taken as income withdrawal will be tax-free if it is paid in respect of a member who was aged under 75 when they died.
If the drawdown funds included uncrystallised funds, to be tax-free the dependant or nominee must become entitled to the annuity within 2 years of the earlier of:
- the day the registered pension scheme administrator first knew of the member’s death
- the day they could first reasonably have been expected to know of it.
Sections 579A and 579CZA(4) and (5) ITEPA 2003
For dependants’ drawdown pension under a registered pension scheme there is an extra condition for tax-free payment if the drawdown pension is paid from either a:
- dependant’s drawdown pension fund created before 6 April 2015
- dependant’s flexi-access drawdown fund that was created from a converted dependant’s drawdown pension fund.
PTM072440 and PTM072450 explain how a dependant’s drawdown pension fund drawdown can be converted to a dependant’s flexi-access drawdown fund.
The dependants’ drawdown pension will be tax-free only if no dependants’ drawdown pension (either as income withdrawal or short-term annuity) was paid before 6 April 2015.
Successors’ drawdown pension
Sections 579A646B(2)/646D(2) and 646C/646E(2) ITEPA 2003
It is not possible for a successors’ drawdown pension to be paid before 6 April 2015. The tax treatment depends on whether the drawdown pension is paid as income withdrawal or short-term annuity.
A successors’ drawdown pension paid as income withdrawal is:
- taxable if it is paid in respect a beneficiary who was aged 75 or older when they died
- tax-free when paid in respect a beneficiary who was younger than 75 when they died.
A successors’ drawdown pension paid in the form of short-term annuity is taxable if it is paid in respect of a beneficiary who either:
- was aged 75 or older when they died
- died before 3 December 2014 at any age.
A successors’ drawdown pension paid in the form of a short-term annuity is tax-free when paid in respect of a beneficiary who died on or after 3 December 2014 aged under 75.
Taxable amount of pension
Where the drawdown pension is taxable, the taxable amount depends on the source of the pension.
Registered pension schemes
Sections 579A, 579B, 579CA and 683 ITEPA 2003
Where a drawdown pension payable to a dependant, nominee or successor is taxable the recipient is liable to pay tax whether or not they are UK resident.
The amount chargeable to tax is the amount of pension that accrues to the individual in the tax year. This may be different to the amount of pension they actually receive in the tax year.
Drawdown pension payments made whilst an individual is temporarily non-resident may become chargeable to tax on their return to the UK. EIM75450 explains when this may happen.
PAYE applies to pensions paid under registered pension schemes. The payer of the pension must apply the PAYE rules before paying the pension. The exception to this rule is pension income that becomes subject to UK tax under the temporary non-residence provisions (see EIM75450).
Overseas pension schemes and relevant non-UK schemes (RNUKS)
Sections 573 and 575 to 576A ITEPA 2003
Where a drawdown pension payable to a dependant, nominee or successor is taxable the recipient is liable to pay tax only if they are UK resident.
Where a drawdown pension is taxable, unless the remittance basis or temporary non-residence provisions apply the taxable amount is the full amount of the pension arising in the tax year.
These pensions are ‘relevant foreign income’ for the purposes of chapters 2, 3 and 4 of Part 8 ITTOIA 2005. For individuals subject to the remittance basis this means tax is due when the annuity is remitted to the UK (see RDRM31030).
Drawdown pension payments made whilst an individual is temporarily non-resident may be ‘relevant withdrawals’ that become chargeable to tax on the individual’s return to the UK. EIM75450 explains when this may happen.
For individuals who return to the UK in 2017 to 2018 or a later tax year, that taxable amount depends on when the pension was actually paid. Where the pension was actually paid after 5 April 2017, the full amount of the payment is taxable. Where the pension was actually paid before 2017 to 2018, the taxable amount is 90% of the amount paid before 6 April 2017.
Position before 6 April 2017
For pensions arising before 6 April 2017, unless the remittance basis applies the taxable amount is 90% of the amount of annuity arising in the tax year. For individuals subject to the remittance basis the taxable amount is the full amount of the annuity remitted to the UK. The 10% deduction is not available for individuals subject to the remittance basis (see RDRM10430).