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HMRC internal manual

Inheritance Tax Manual

From
HM Revenue & Customs
Updated
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Pensions: other provisions: income drawdown

Income drawdown is the situation where the deceased has reached pension age but has chosen not to buy an annuity that will provide their pension. Instead they decide to draw a certain level of income from their pension fund with a view to buying an annuity at a later date.

The option to defer purchase of an annuity was introduced by FA95 at a time when annuity rates were relatively poor. This allowed the member to defer taking their whole retirement benefits. They would take a part lump sum and a certain level of income drawdown (between 35% - 100% of what the fund produced) and then at some later date (but no later than age 75) when annuity rates had hopefully improved the member could go back and purchase an annuity with the balance of the fund.

For Inheritance Tax (IHT) purposes the member is effectively taking less than their full entitlement when they retire so there is a possibility of an IHT lifetime transfer (IHTM14000) for a failure to exercise a right under IHTA84/S3 (3).

In June 1999 the ABI (after discussion with HMRC Inheritance Tax) issued a guidance note (IHTM17503) setting out the basis on which IHT might arise. The charges that can arise relate to:

  • lifetime transfers within IHTA84/S3 (3)
  • IHTA84/S5 (2) on death of ‘survivor’ (IHTM17104)
  • changes to benefits.