PTM072200 - Death benefits: types of pension: beneficiary's annuity: A beneficiary's annuity

Glossary PTM000001

A beneficiary’s annuity - general
Purchase of a dependants’ or nominees’ annuity in the member’s lifetime – a related annuity
Purchase of a dependants’ or nominees’ annuity after the member’s death
Conditions for an annuity contract to be a dependants’ annuity
Conditions for an annuity contract to be a nominees’ annuity
Conditions for an annuity to be a successors’ annuity
Death benefits paid from an annuity contract purchased before 6 April 2006
A beneficiary’s annuity and the lifetime allowance
Taxation of a beneficiary’s annuity
Transfer of a beneficiary’s annuity from one insurance company to another

A beneficiary’s annuity - general

Section 167(1) pension rules 3, 3A and 3B Finance Act 2004

Paragraphs 17, 27AA and 27FA schedule 28 and paragraph 3(4A) schedule 29 Finance Act 2004

Before 6 April 2015 only a dependant could receive an annuity as an authorised pension payment following the death of member. From 6 April 2015, in addition to a dependant, an annuity can also be provided to a nominee and a successor. For the purposes of this guidance, a beneficiary may be any of a dependant, a nominee or a successor.

Beneficiary’s annuity is the collective term for an annuity payable to either a dependant, nominee or successor. A beneficiary’s annuity contract can only be purchased from an insurance company using funds held under a money purchase arrangement.

An annuity payable to a dependant is called dependants’ annuity.

An annuity payable to a nominee is called nominees’ annuity pension.

An annuity payable to a successor is called successors’ annuity.

A dependants’ or nominees’ annuity may be paid following the death of a member. The annuity contract providing the annuity may be purchased:

A successor’s annuity may be paid following the death of a dependant, nominee or another successor of the member (the previous beneficiary). It can be purchased only following the death of the previous beneficiary.

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Purchase of a dependants’ or nominees’ annuity in the member’s lifetime – a related annuity

A future dependants’ or nominees’ annuity may be provided for at the time the member purchases a lifetime annuity. This may be purchased either:

  • under the same contract providing the member’s lifetime annuity, with the annuity contract being written on a ‘joint life’ basis
  • under a separate contract to the member’s lifetime annuity (whether with the same insurance company or not) but purchased within the 7 days before or after the purchase of that lifetime annuity.

A dependants’ or nominees’ annuity purchased in these circumstances is referred to in the legislation as a ‘related annuity’.

An annuity providing for a future pension benefit to a dependant or nominee of a member that is purchased in the member’s lifetime but outside the above timeframe is not a dependants’ or nominees’ annuity.

A related dependants’ annuity contract should only provide a continuing dependants’ annuity to a person (or persons) who is (or are) dependent on the member at the time of that member’s death. A person who was married to, or who was the civil partner of, the member at the time the member’s lifetime annuity was purchased may be treated as a dependant of the member at the time of their death, whether still married to or in a civil partnership with that person at that time or not (see PTM071200).

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Purchase of a dependants’ or nominees’ annuity after the member’s death

A dependants’ or nominees’ annuity can also be purchased after the member’s death. The annuity contract may be purchased using any uncrystallised funds, drawdown pension fund or flexi-access drawdown fund remaining on the death of the member. Alternatively, a dependant may purchase a dependants’ annuity using funds from their dependant’s’ flexi-access drawdown fund or dependants’ drawdown pension fund. A nominee may purchase a nominees’ annuity using funds from their nominee’s flexi-access drawdown fund.

Conditions for an annuity contract to be a dependants’ annuity

Paragraphs 15(2A) and (2B), 17 and 27AA schedule 28 Finance Act 2004

A dependants’ annuity contract must be purchased either:

The annuity must be payable by an insurance company to the dependant until the dependant’s death. Alternatively, the annuity contract can provide for the annuity to be payable until the earlier of the dependant marrying, entering into a civil partnership or their death.

If the dependant is a child of the member the annuity must stop when that child ceases to be a dependant (see PTM071200). Note that the extended definition of a dependant under paragraph 15(2A) schedule 28 covering children age 23 or older does not apply for the purpose of the definition of and conditions for a dependants’ annuity.

If the child is not a dependant because of physical or mental impairment, and they are not covered by one of the pre-5 April 2006 transitional protections explained at PTM071200 the annuity must cease by age 23.

If the child is a dependant on or after age 23 because they are covered by one of the pre-6 April 2006 transitional protections set out at PTM071200 the annuity must stop when that child ceases to be a dependant in accordance with the relevant transitional provision.

Extra conditions for dependants’ annuity before 6 April 2015

Paragraph 17(1) schedule 28 Finance Act 2004

Where the annuity was purchased before 6 April 2015, the following extra conditions must also be met:

  • where the annuity is a related dependants’ annuity purchased in the member’s lifetime the member had an opportunity to select the insurance company
  • where the annuity was purchased after the member’s death the dependant had an opportunity to select the insurance company
  • the amount of the annuity to be paid each year cannot decrease or can only do so in circumstances prescribed by HMRC regulations.

If the member or dependant was not given the opportunity to choose their annuity provider (often called the open market option), the resulting annuity contract does not satisfy the conditions to be a dependants’ annuity.

If the member or dependant has the opportunity to choose their annuity provider but failed to select an insurance company, the scheme administrator or scheme trustees may select the insurance company.

Where the entitlement to the dependants’ annuity arose before 6 April 2015, the circumstances in which the annual rate of income may be varied are essentially the same as the circumstances where the income provided by a member’s lifetime annuity may be varied. For more information see PTM062400 (substituting any reference to ‘member’ with ‘dependant’, except where specifically mentioned in the text). These circumstances include the application of a pension sharing order that reduces the income provided by a dependants’ annuity or a court order writing down the liabilities of the insurer under section 377A of the Financial Services and Markets Act 2000.

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Conditions for an annuity contract to be a nominees’ annuity

Section 167(1) Finance Act 2004

Paragraph 27AA schedule 28 Finance Act 2004

An annuity is a nominees’ annuity if the contract is purchased either:

In addition, all the following conditions must be met:

  • the nominee became entitled to the annuity on or after 6 April 2015
  • the annuity is payable by an insurance company to the nominee until the nominee’s death, however, a nominees’ annuity can stop earlier if the nominee marries or enters into a civil partnership.

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Conditions for an annuity contract to be a successors’ annuity

Section 167(1) Finance Act 2004

Paragraph 27FA schedule 28 Finance Act 2004

An annuity is a successors’ annuity only if it meets all the following conditions:

  • the contract is purchased after the death of a dependant, nominee or another successor of the member (the previous beneficiary) who died on or after 3 December 2014
  • the contract is purchased using ‘undrawn funds’. That is any beneficiary’s flexi-access drawdown fund or (where the previous beneficiary is a dependant, any dependants’ drawdown pension fund) remaining on the death of the previous beneficiary
  • the successor became entitled to the annuity on or after 6 April 2015
  • the annuity is payable by an insurance company until the successor’s death, however, a successors’ annuity can stop earlier if the successor marries or enters into a civil partnership.

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Death benefits paid from an annuity contract purchased before 6 April 2006

Section 161(3A) schedule 36 Finance Act 2004

Article 2 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

An annuity contract that was:

  • purchased before 6 April 2006 using the sums and assets of any tax-approved scheme
  • used to secure the benefits provided under that tax-approved scheme, and
  • paying benefits before 6 April 2006,

did not become a registered pension scheme on 6 April 2006.

Any pension death benefit provided by such a contract will reflect the dependency tax rules applying before 6 April 2006 to the scheme under which the benefit is provided.

The benefit payment rules under Finance Act 2004 will not apply to such an annuity as long as the following two conditions are both met:

  • the terms of the annuity, or any agreement or arrangement made in connection with the annuity, do not allow a payment that if it had been made before 6 April 2006 would have given HMRC grounds to withdraw the tax approval of the pension scheme
  • the terms of the contract have not been altered on or after 6 April 2006 to allow for a payment that if it was made by a registered pension scheme would be an unauthorised payment.

This means the conditions defining a beneficiary’s annuity do not apply to the pre-6 April 2006 annuity contract.

However, if the two conditions above are not met then the benefit payment rules under Finance Act 2004 will apply to payments under the annuity contract. This means that unless the annuity satisfies the condition for a dependants’ annuity any annuity payment will be an unauthorised payment.

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A beneficiary’s annuity and the lifetime allowance

Section 216 BCEs 4 and 5D and paragraphs 14B and 14C schedule 32 Finance Act 2004

Where the dependants’ or nominees’ annuity is a related annuity (see Purchase of a dependants’ or nominees’ annuity in the member’s lifetime above) the purchase of the annuity forms part of a BCE 4 (see PTM088640). The amount crystallising under the BCE 4 is the total of the purchase price of the member’s lifetime annuity and the related dependants’ or nominees’ annuity.

From 6 April 2015 the purchase of a dependants’ or nominees’ annuity after the member’s death may be a benefit crystallisation event, a BCE 5D. A lifetime allowance charge may arise as a result of the annuity purchase. Not every annuity purchase by a dependant or nominee will be a benefit crystallisation event.

The purchase of a successors’ annuity is not a benefit crystallisation event.

A BCE 5D occurs when:

  • on or after 6 April 2015 a dependant or nominee becomes entitled to a dependants’ annuity or nominees’ annuity that was purchased using ‘unused uncrystallised funds’ (see below)
  • the annuity is payable in respect of the death of a member aged under 75 that occurred on or after 3 December 2014, and
  • the dependant or nominee became entitled to the annuity within 2 years of the day when the scheme administrator first knows (or could reasonably have been expected to know) of the member’s death.

Broadly, unused crystallised funds are sums and assets held under a money purchase arrangement that were uncrystallised immediately before the member’s death, and since the member’s death have not been used not provide an authorised pension death benefit.

PTM088660 provides more information about BCE 5D.

As a successors’ annuity can only be purchased from funds which have already crystallised, the purchase is not a BCE.

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Taxation of a beneficiary’s annuity

Sections 579A to 579D, 646B and 646C Income Tax (Earnings and Pensions) Act 2003

Before 6 April 2015 payments of dependants’ annuities were taxable as pension income of the recipient. Payment of a nominees’ annuity or a successors’ annuity before 6 April 2015 is not possible as the definition of a nominees’ or successor’s annuity requires the nominee or successor to become entitled to it on or after 6 April 2015.

From 6 April 2015 payments of beneficiary’s annuity may be taxable, or they may be tax-free. The exact rules depend on the type of annuity and how it was purchased.

Whatever the type of annuity, or how it was purchased, it is taxable if it is paid in respect of a beneficiary who:

  • was aged 75 or older when they died, or
  • died before 3 December 2014, at any age.

PTM072210 provides detailed guidance on the tax treatment of payments of a beneficiary’s annuity made on or after 6 April 2015.

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Transfer of a beneficiary’s annuity from one insurance company to another

Paragraphs 17(3) to (5), 27AA(3) to (5) and 27FA(3)to(5) schedule 28 Finance Act 2004

The Registered Pension Schemes (Transfer of Sums and Assets) Regulations 2006 - SI 2006/499

A beneficiary’s annuity contract represents the contractual liability of an insurance company to pay a pension to a beneficiary in respect of a member of a registered pension scheme, either for life or until a given situation arises.

The annuity is not being paid directly under a registered pension scheme. An annuity contract can be transferred from one insurance company to another, but it won’t be a recognised transfer because no registered pension scheme is directly involved.

The annuity contract will have been purchased using the sums and assets from a registered pension scheme. Section 161 Finance Act 2004 provides that the payments rules and tax charges apply to payments from an insurance or annuity contract acquired using registered pension scheme funds.

Where a beneficiary’s annuity is transferred from one insurance company to another the amount transferred between insurance companies will be an unauthorised payment unless certain conditions are met.

PTM106000 provides guidance on the transfer of beneficiary’s annuities between insurance companies.

There is no obligation requiring an insurance company to either make or accept a transfer of a beneficiary’s annuity liability. It is not something the beneficiary can instigate without the agreement of the insurance company concerned. There would of course also need to be agreement between the two insurance companies on the value of the annuity business in question based on an analysis of the policy terms and conditions.

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