PTM072210 - Death benefits: types of pension: beneficiary's annuity: taxation of beneficiary’s annuities
As of 6 April 2024 there is no longer lifetime allowance. If you are looking for information about protections, enhancement factors and the lifetime allowance charge please see these pages on The National Archives.
If you are looking for information about the principles of lifetime allowance and benefit crystallisation events please see these pages of The National Archives.
Glossary |
Sections 579A, 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 when 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.
Where the beneficiary’s annuity is taxable, it is taxable as pension income. The beneficiary receiving the annuity is liable for income tax on the annuity payments at their marginal rate of tax. The insurance company is required to deduct income tax from the annuity payments, under the PAYE regulations.
Dependants’ and nominees’ annuity purchased during the member’s lifetime
Dependants’ and nominees’ annuity purchased after the member’s death
Dependents’ and nominees’ annuity purchased using funds from flexi-access drawdown fund
Dependants’ annuity purchased using funds from dependants’ drawdown pension fund
Successors’ annuities
Annuity contract purchased before 6 April 2006
Dependants’ and nominees’ annuity purchased during the member’s lifetime
Sections 579A, 579D and 646B(3) Income Tax (Earnings and Pensions) Act 2003
Where the dependants’ or nominees’ annuity is a related to the member’s lifetime annuity (see PTM072200), any payment made on or after 6 April 2015 is taxable if:
- it is paid in respect of a member who was aged 75 or older when they died,
- it is paid in respect of a member who died before 3 December 2014 at any age, or
- an annuity payment was made under the contract before 6 April 2015.
If the annuity contract is a replacement for a previous dependants’ or nominees annuity contract that is related to the member’s lifetime annuity, the annuity will be taxable if:
- any of the previous dependants’ or nominees’ annuity contracts made payments before 6 April 2015,
- the annuity is paid in respect of a member who was aged 75 or older when they died, or
- the annuity is paid in respect of a member who died before 3 December 2014 at any age.
Payments of dependants’ or nominees’ annuity made on or after 6 April 2015 under a contract that is related to the member’s lifetime annuity are not taxable if:
- it is paid in respect of a member who died on or after 3 December 2014 aged under 75, and
- no annuity payment was made under the contract before 6 April 2015. If the annuity contract is a replacement for previous dependants’ annuity contract, the annuity will be tax free only if none of the previous dependants’ annuity contracts made payments of dependants’ annuity before 6 April 2015.
Dependants’ and nominees’ annuity purchased after the member’s death
Sections 579A, 579D and 646B(1) Income Tax (Earnings and Pensions) Act 2003
If a dependants’ or nominees’ annuity contract is purchased after the member’s death using the member’s remaining unused drawdown funds or uncrystallised funds, or it is a replacement contract for such a contract, any dependants’ or nominees’ annuity payment made on or after 6 April 2015 is taxable if:
- it is paid in respect of a member who was aged 75 or older when they died,
- it is paid in respect of a member who died before 3 December 2014 at any age, or
- an annuity payment was made under the contract before 6 April 2015.
If the annuity contract is a replacement for previous contract, the annuity will be taxable if any of the previous’ annuity contracts made payments of dependants’ annuity before 6 April 2015.
If the sums and assets used to purchase the annuity contract included ‘unused uncrystallised funds’, the annuity will also be taxable if the beneficiary did not become entitled to the annuity within two years of the earlier of:
- the day the scheme administrator first knew of the member’s death, or
- the day they could first reasonably have been expected to know of it.
The legislation refers to this period as the ‘relevant two-year period’.
If the annuity contract is a replacement for a previous contract purchased using ‘unused uncrystallised funds’ any annuity payment will be taxable if the beneficiary did not become entitled to the annuity under the previous contract within the relevant two-year period.
Broadly, ‘unused uncrystallised funds’ are funds 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 to provide an authorised pension death benefit (see PTM071000).
Payments of dependants’ or nominees’ annuity made on or after 6 April 2015 under a contract purchased after the member’s death will be tax free if:
- it is paid in respect of a member who died on or after 3 December 2014 aged under 75,
- no annuity payment was made under the contract before 6 April 2015. If the annuity contract is a replacement for previous dependants’ annuity contract, the annuity will be tax free only if none of the previous dependants’ annuity contracts made payments of dependants’ annuity before 6 April 2015, and
- if the contract was purchased using ‘unused uncrystallised funds’ the beneficiary became entitled to the annuity within the relevant two-year period. If the annuity contract is a replacement for previous contract purchased using ‘unused uncrystallised funds’, the annuity will be tax free only if the beneficiary became entitled to the annuity under the previous contract within the relevant two-year period.
Dependents’ and nominees’ annuity purchased using funds from flexi-access drawdown fund
Sections 579A, 579D and 646C(1), (5) and (6) Income Tax (Earnings and Pensions) Act 2003
A payment of dependants’ or nominees’ annuity under a contract purchased using funds from the dependant’s or nominee’s (as appropriate) flexi-access drawdown fund is taxable if:
- it is paid in respect of a member who was aged 75 or older when they died, or
- it is paid in respect of a member who died before 3 December 2014 at any age.
Payments of dependants’ or nominees’ annuity under a contract purchased using funds from the dependant’s or nominee’s (as appropriate) flexi-access drawdown fund are taxable if:
- any of the funds designated to create that flexi-access drawdown fund included the member’s ‘unused uncrystallised funds’ (see PTM072430), and
- those unused uncrystallised funds were not designated within two years of the earlier of the day the scheme administrator first knew of the member’s death, or the day they could first reasonably have been expected to know of it (the relevant two-year period).
A payment of dependants’ annuity under a contract purchased using funds from the dependant’s flexi-access drawdown fund is also taxable if:
- any sums and assets in that flexi-access fund derive from a dependants’ drawdown pension fund, and
- before 6 April 2015 dependants’ income withdrawal was paid from the dependants’ drawdown pension fund or payments of dependants’ short -term annuity or dependants’ annuity were made before 6 April 2015 where that annuity was purchased using funds from the dependants’ drawdown pension fund.
Funds under a dependants’ flexi-access drawdown fund will derive from a dependants’ drawdown pension fund if:
- immediately before 6 April 2015 the dependant was in flexible drawdown and so converted to flexi-access on 6 April 2015 – see PTM072440, or
- on or after 6 April 2015 the dependant converted to flexi-access as described at PTM072450.
A payment of dependants’ annuity under a contract purchased using funds from the dependant’s flexi-access drawdown fund is tax free if:
- it is paid in respect of a member who died on or after 3 December 2014 aged under 75, and
- any of the funds designated to create that flexi-access drawdown fund included the member’s ‘unused uncrystallised funds’ (see PTM072430) the funds were designated within the relevant two-year period (see above), and
- any sums and assets in that flexi-access fund derive from a dependants’ drawdown pension fund, and no payments have been made that would make the annuity taxable (see above).
A payment of nominees’ annuity under a contract purchased using funds from the nominee’s flexi-access drawdown fund is tax free if:
- any of the funds designated to create that flexi-access drawdown fund included the member’s ‘unused uncrystallised funds’ (see PTM072430) the funds were designated within the relevant two-year period (see above), and
- it is paid in respect of a member who died on or after 3 December 2014 aged under 75.
Dependants’ annuity purchased using funds from dependants’ drawdown pension fund
Sections 579A, 579D and 646C(1) and (4) Income Tax (Earnings and Pensions) Act 2003
A payment of dependants’ annuity under a contract purchased using funds from the dependants’ drawdown pension fund is taxable if:
- it is paid in respect of a member who was aged 75 or older when they died, or
- it is paid in respect of a member who died before 3 December 2014 at any age.
A payment of dependants’ annuity under a contract purchased using funds from the dependants’ drawdown pension fund is also taxable if before 6 April 2015 any of the following payments were made:
- Dependants’ income withdrawal from the dependant’s drawdown pension fund
- Dependants’ short-term annuity or dependant’s annuity made under any contract purchased using funds from the dependant’s drawdown pension fund.
A payment of dependants’ annuity under a contract purchased using funds from the dependants’ drawdown pension fund is tax free if:
- it is paid in respect of a member who died on or after 3 December 2014 aged under 75,
- before 6 April 2015 no payment of dependants’ income withdrawal was made from the dependants’ drawdown fund pension fund, and
- before 6 April 2015 no payments of annuity were made under any dependants’ short-term annuity or dependants’ annuity contract purchased with sums and assets from the dependants’ drawdown pension fund.
Successors’ annuities
Sections 579A, 579D, 646B(2) and 646C(2) Income Tax (Earnings and Pensions) Act 2003
Payments of a successors’ annuity paid in respect of a beneficiary who died on or after 3 December 2014 aged under 75 are not taxable.
A successors’ annuity paid in respect of a beneficiary who died:
- aged 75 or older, or
- before 3 December 2014 at any age
is taxable.
Annuity contract purchased before 6 April 2006
Part 9 Income Tax (Earnings and Pensions) Act 2003
Paragraph 45A Schedule 36 Finance Act 2004
Article 2(3) The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572
A contract purchased before 6 April 2006 to provide a pre 6-April 2006 dependant with an annuity following the death of a pension scheme member may pay a tax- free annuity if all the following conditions are met:
- The annuity purchase conditions
- The annuity contract term conditions
- The annuity payment conditions.
If these conditions are not satisfied the annuity is taxable as pension income of the recipient.
Annuity purchase conditions
The annuity was purchased before 6 April 2006 by a ‘tax approved’ pension scheme that could automatically become a registered pension scheme on 6 April 2006 (see PTM031300).
The annuity was purchased to provide or secure benefits payable under that pension scheme.
The annuity was purchased from an insurance company together with an annuity payable for the life of the member of the pension scheme.
The pre 6-April 2006 dependant’s annuity is purchased together with the member’s life annuity if the contract is:
- a ‘joint life’ annuity; that is a single contract providing an annuity for the life of the member and then an annuity to the pre 6-April 2006 dependant following the member’s death, or
- a separate contract purchased within seven days before or after the purchase of the contract annuity providing the annuity for the life of the member.
Annuity contract terms conditions
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.
Annuity payment conditions
The annuity is payable in respect of and following the death of the pension scheme member.
That pension scheme member died on or after 3 December 2014 aged under 75.
No annuity was paid to the pre 6 April 2006 dependant before 6 April 2015.
At all times on or after 6 April 2006 both the annuity payable to the pension scheme member and the annuity payable to the pre 6 April 2006 dependant satisfied the annuity contract terms conditions.