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HMRC internal manual

Inheritance Tax Manual

From
HM Revenue & Customs
Updated
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Pensions: IHT Charges: protected rights detail

The form in which income may be taken from protected rights depends on whether the scheme is an occupational pension scheme (IHTM17022) or a personal pension scheme (IHTM17023).

Occupational Scheme

The only methods of taking income from protected rights funds are scheme pension (IHTM17500) and annuity purchase. Where the member is married or in a civil partnership at the time that the rights come into payment, provision must be made for the continuation of the pension or annuity on the death of the member to the spouse or civil partner at a rate of:

  • 50% of the member’s pension or annuity, or
  • 100% for the remainder of a 5 year guarantee period where the member dies during that period and 50% after that.

Personal Pension Scheme

Income can be taken from protected rights funds using income drawdown, if it is offered by the scheme, as well as the methods outlined above.

Inheritance Tax (IHT) consequences

There can only be IHT consequences where the pension is a personal pension in an income drawdown arrangement.

Where a pension scheme member dies before age 75, or at any age between 6 April 2011 and 5 April 2012, the remaining fund may be used as follows:

  • where the member is survived by a spouse or civil partner income drawdown can continue. As an alternative the survivor may choose at any time to use the remaining fund to purchase a scheme pension or lifetime annuity (no guarantee period is available).
  • where the member is not survived by a spouse or civil partner the remaining fund, less a tax charge of 35% (55% between 6 April 2011 and 5 April 2012), may be payable to any person named by the member in writing. Or (where no such nomination has been made) to their estate. In either case the payment will be included in the member’s estate for Inheritance Tax purposes. Where the payment is to a nominated person, a charge to tax will arise under IHTA84/S3(3) (up to 5 April 2011) and IHTA84/S5(2). Where the payment is to the estate it is part of the deceased’s estate for IHT purposes, IHTA84/S5(1).
  • where the member is survived by a ‘dependant’ (as defined by HMRC) who is not a spouse or civil partner that ‘dependant’ can take a lump sum or go into income drawdown or buy an annuity
  • in the event of a surviving spouse or civil partner subsequently dying during income drawdown, the remaining fund will be payable to any person named by the survivor in writing. Otherwise it will pass to their estate. The payment will form part of the survivor’s estate for IHT purposes unless it is paid to charity
  • for IHT purposes where the survivor dies before age 75 the amount taken into consideration as an asset of the survivor’s estate would be the remaining fund less an income tax charge of 35% (55% between 6 April 20011 and 5 April 2012). Where the survivor dies on or after age 75 the IHT charge depends on the interaction with the income tax charge (IHTM17402)

If a member dies on or after age 75, but before 6 April 2011, drawing their protected rights via income drawdown the remaining fund may be used as follows:

  • where the member is survived by a spouse or civil partner, drawdown may continue.
  • where the member is not survived by a spouse or civil partner, the remaining fund may be payable to any person named by the member in writing or, where no such nomination has been made, to their estate. In either case the remaining fund will be taken into account for IHT purposes unless it is paid to a charity.
  • in the event of a surviving spouse or civil partner subsequently dying during income drawdown the remaining fund will be payable to any person named by the survivor in writing, otherwise to their estate.
  • on the death of the survivor the remaining fund forms part of the member’s estate for Inheritance Tax purposes. There will also be an income tax charge which depends on the age of the survivor at the date of death (IHTM17402).

Technical will advise on any claims to Inheritance Tax arising on protected rights.