Beta This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Pensions Tax Manual

Death benefits: Types of pension: dependants’ drawdown pension: dependants’ capped drawdown pension (up to 5 April 2015)

Glossary PTM000001
   

 

Dependants’ capped drawdown
Difference between capped drawdown and flexible drawdown
Switching between capped drawdown and flexible drawdown
The maximum that can be taken as dependants’ capped drawdown pension
Calculating the maximum dependants’ drawdown pension
Reviewing the maximum annual amount before age 75
Reviewing the maximum annual amount from age 75
Dependants’ drawdown pension under several arrangements
Review triggered by specific events
Using drawdown funds to provide other forms of dependants’ pension

Note: dependant’s capped drawdown that began on or before 5 April 2015 may continue, providing there have been no events since that date resulting in its conversion to flexi-access drawdown. But no new dependants’ capped drawdown funds or dependants’ flexible drawdown funds may be set up from 6 April 2015 onwards.

See page PTM072400 for guidance on dependants’ flexi-access drawdown funds.

See page PTM072360 for guidance on the taxation of dependants’ capped drawdown funds which continue after 6 April 2015 without being converted to dependants’ flexi-access drawdown funds.

Dependants’ capped drawdown

Paragraph 24 Schedule 28 Finance Act 2004

Capped drawdown is a form of ‘dependants’ income withdrawal’ where the pension is paid direct from the pension scheme. Within certain limits, the dependant can choose how much they get each year and can change the amount they receive each year.

When the dependant starts to take their dependants’ capped drawdown pension, the scheme administrator will work out how much they can take each year. If they are under 75, the scheme administrator will review this amount normally every three years. If they are 75 or over, the scheme administrator will review this amount every year.

There is another type of ‘income withdrawal’ drawdown pension called flexible drawdown.

Top of page

Difference between capped drawdown and flexible drawdown

Section 167 - Pension Death Benefit Rule 4 Finance Act 2004

With capped drawdown, there is a limit on the amount of pension a dependant can take from the scheme each year. This limit is regularly reviewed.

With flexible drawdown, there is no limit on the amount of drawdown pension a dependant can take each year and they can take as much or as little as they like. There is also no need for the pension fund to be reviewed to work out the maximum possible pension. However, not everyone can take flexible drawdown. In particular, the dependant must be getting a minimum amount of secure pension income every year to qualify for flexible drawdown.

See PTM072330 for more about flexible drawdown.

Top of page

Switching between capped drawdown and flexible drawdown

Section 167(2A) Finance Act 2004

If a dependant meets the conditions for flexible drawdown, they can change from capped to flexible drawdown at any time if the scheme allows.

The test on whether or not a dependant qualifies for flexible drawdown is only at the start of flexible drawdown which means that, under the tax rules, the dependant can’t lose the ability to take drawdown pension using flexible drawdown.

Top of page

The maximum that can be taken as dependants’ capped drawdown pension

Section 167 - Pension death benefit rule 4 Finance Act 2004

There is no minimum amount that that has to be taken each year. However, there is a maximum amount that can be paid each year as dependants’ capped drawdown.

The amount of dependants’ capped drawdown from a pension arrangement is limited to the maximum dependants’ drawdown pension for the arrangement less the amount of any dependants’ short-term annuity paid from the same arrangement.

Example

Adam has designated £400,000 into dependants’ drawdown pension. His scheme administrator has worked out that the maximum drawdown pension Adam can have each year is £22,000. Adam used funds from his dependants’ drawdown pension fund to buy a dependants’ short-term annuity. He is paid £4,650 from the dependants’ short-term annuity each year. This payment of the dependants’ short-term annuity reduces the amount of dependants’ drawdown pension Adam can be paid as income withdrawal. The maximum income withdrawal on top of the dependants’ short term annuity Adam can have each year is £17,350 (£22,000 - £4,650 = £17,350).

The maximum amount of dependants’ drawdown pension that a pension arrangement can pay each year for drawdown pension years beginning before 26 March 2013 is 100 per cent of an equivalent annuity that could be purchased with the dependants’ drawdown pension fund. For drawdown pension years beginning between 26 March 2013 and 26 March 2014, the maximum amount rises to 120 per cent. And for drawdown pension years beginning on or after 27 March 2014, the maximum amount is 150 per cent of an equivalent annuity. This annuity equivalent is known as ‘the basis amount’. The scheme administrator calculates the basis amount and the tax legislation specifies how to do this.

The maximum amount of dependants’ drawdown pension is measured over a ‘pension year’. A pension year for an arrangement runs for 12 months from the date funds are first designated to provide dependants’ drawdown pension under the arrangement. Each following pension year follows this date. Once set, the pension year cannot be changed before the person receiving it is 75. In limited circumstances, a pension year can be changed after reaching age 75.

If the dependant takes less than the maximum amount in one pension year they cannot, under capped drawdown, take the balance in a later pension year.

Example

On 1 October 2011 Harry designates £100,000 to provide a dependants’ drawdown pension. Harry has not previously drawn any benefits from this arrangement. This first designation of funds into dependants’ drawdown pension sets Harry’s pension years. Harry’s pension years are as follows:

1 October 2011 to 30 September 2012 (the first pension year)

1 October 2012 to 30 September 2013 (the second pension year)

1 October 2013 to 30 September 2014 (the third pension year) and so on.

Top of page

Calculating the maximum dependants’ drawdown pension

Paragraph 24 Schedule 28 Finance Act 2004

To work out the maximum dependants’ drawdown pension, the scheme administrator must first work out the basis amount. This is because the maximum drawdown pension is 100 per cent of the basis amount for drawdown pension years beginning before 26 March 2013, increasing to 120 per cent for drawdown pension years beginning between 26 March 2013 and 26 March 2014, and 150 per cent for drawdown pension years beginning on or after 27 March 2014.

A scheme administrator calculates the basis amount by using the GAD tables (external readers please see https://www.gov.uk/government/publications/drawdown-pension-tables).

To calculate the basis amount the scheme administrator also needs to know:

  • the date of the calculation (the date the dependant designates funds for drawdown)
  • the value of the dependants’ drawdown pension fund on the calculation date
  • the dependant’s age on the calculation date, and
  • a gilt yield for 15-year UK gilts from the FTSE UK Gilt Indices. This figure must be for the 15th day of the month before the calculation date. If the 15th day of that month was a non-working day, use the nearest working day before the 15th.

Example

On 1 September 2011, Elaine tells her pension scheme administrator that she is designating £150,000 into dependants’ drawdown pension. This is the first time she has taken benefits from the scheme.

Elaine’s scheme administrator has to work out the maximum dependants’ drawdown pension Elaine can have. They know the date of the calculation is the date Elaine designated funds, i.e. 1 September 2011. They also know the value of the dependants’ drawdown pension fund on that day was £150,000.

Elaine’s maximum dependants’ drawdown pension will be 100 per cent of the ‘basis amount’. So Elaine’s scheme administrator needs to calculate the ‘basis amount’ for Elaine. To do this they need to know:

* how old Elaine is on 1 September 2011, and
* the yield figure on 15 August 2011 for 15-year UK gilts from the FTSE Gilt Indices.

The scheme administrator needs this information so that they can find Elaine’s basis amount using the 2011 GAD tables.

Elaine is 58 on 1 September 2011 and the 15-year UK gilt yield percentage on 15 August 2011 is 4.15 per cent. This yield figure needs to be rounded down to the nearest 0.25 per cent. This gives a yield figure of 4.00 percent for the calculation of the basis amount.

Using the 2011 GAD table for women aged 23 and over, the scheme administrator looks up the amount for a 58-year-old and a gilt yield of 4 per cent. This shows an annuity equivalent of £55 pension per £1,000 of dependants’ drawdown pension fund.

Elaine has a dependants’ drawdown pension fund of £150,000. This means Elaine’s basis amount is £8,250 (150,000/1,000 x £55 = £8,250).

The maximum dependants’ drawdown pension Elaine can have for each pension year beginning before 26 March 2013 is £8,250. Her pension years run from 1 September to 31 August so this applies for Elaine’s drawdown pension years ending on 31 August 2012 and 2013. For the drawdown pension year starting 1 September 2013, the maximum drawdown pension Elaine can have increases to £9,900 (120 per cent of the basis amount of £8,250). And for the drawdown pension year starting 1 September 2014, Elaine’s maximum drawdown pension is 150 percent of the basis amount.

Top of page

Reviewing the maximum annual amount before age 75

Paragraphs 24 to 24C Schedule 28 Finance Act 2004

Where the dependant is 75 or over, the maximum dependants’ drawdown pension must be recalculated at the start of every pension year.

Where the dependant is under 75, the maximum dependants’ drawdown pension is usually recalculated every three years, starting from when they first designated funds into dependants’ drawdown pension. This three-year period is called a ‘reference period’. At the start of a new reference period, the maximum dependants’ drawdown pension must be recalculated. The dependant can ask for the reference period to end earlier than this (see below).

Other events can trigger a recalculation of the maximum drawdown pension, but do not change the reference period - see PTM072330.

The scheme administrator recalculates the maximum dependants’ drawdown pension in the same way as they worked out the original maximum dependants’ drawdown pension. However, this time the scheme administrator can carry out the calculation of the maximum dependants’ drawdown pension on any day in the period of 60 days ending on the new reference date. So if the new reference period starts on 1 July 2015, the scheme administrator can carry out the maximum dependants’ drawdown pension calculation at any time from 3 May 2015 to 1 July 2015. The date chosen by the scheme administrator is called the ‘nominated date’. It is the scheme administrator who chooses the nominated date (they may if they wish consult the dependant over this).

The reference period does not have to last for three years and can be reduced but not extended. To change the reference period, a dependant must ask the scheme administrator before the end of their current pension year. The scheme administrator does not have to agree to the request but if they do, the new reference period will start the day after the end of the current pension year. The scheme administrator cannot change the reference period unless the dependant has asked them to do so.

Example

Edward designated benefits into dependants’ drawdown pension on 1 May 2012, when he was aged 65. His reference period was due to run from 1 May 2012 to 30 April 2015 with his pension years running from:

* 1 May 2012 to 30 April 2013
* 1 May 2013 to 30 April 2014
* 1 May 2014 to 30 April 2015

Edward’s dependants’ drawdown pension fund has performed very well since he first went into dependants’ drawdown pension. He wants to take a bigger pension. To do this, Edward needs his scheme administrator to recalculate the maximum amount of pension he can take (the basis amount). As nothing else has happened that could trigger a recalculation of his basis amount Edward needs to start a new reference period.

On 6 April 2014, Edward asks his scheme administrator to end his reference period at the end of his current pension year, which is 30 April 2014. Edward’s scheme administrator agrees to his request. Edward’s reference period ends on 30 April 2014. His new reference period starts on 1 May 2014 made up of the following pension years:

* 1 May 2014 to 30 April 2015
* 1 May 2015 to 30 April 2016
* 1 May 2016 to 30 April 2017.

Top of page

Reviewing the maximum annual amount from age 75

Paragraphs 24 to 24C Schedule 28 Finance Act 2004

A dependants’ capped drawdown pension can still be paid when the dependant is aged 75 or older. There is still no minimum amount that they need to take each year. The maximum dependants’ drawdown pension will continue to be 100 per cent of the basis amount for drawdown pension years beginning before 26 March 2013, increasing to 120 per cent for drawdown pension years beginning between 26 March 2013 and 26 March 2014, and 150 per cent for drawdown pension years beginning on or after 27 March 2014. However, the maximum drawdown pension will now need to be recalculated at the start of every pension year. The dependant will switch over to yearly reviews at the end of the pension year following their 75th birthday.

Example

Colin is being paid a dependants’ capped drawdown pension. His pension years run from 1 June to 31 May. Colin is 75 on 30 June 2016. The first pension year after Colin is 75 starts on 1 June 2017. Colin’s maximum dependants’ drawdown pension will be recalculated for that point.

The scheme administrator recalculates the maximum dependants’ drawdown pension by using the GAD tables (external readers see https://www.gov.uk/government/publications/drawdown-pension-tables)

Example

Delia originally designated £100,000 into dependants’ drawdown pension on 1 October 2011. Delia’s three-year reference period would normally run to 30 September 2014. However, Delia is 75 on 20 November 2012. This means that Delia must switch over to annual reviews of her maximum dependants’ drawdown pension on 1 October 2013.

Delia’s scheme administrator needs to work out the maximum amount of drawdown pension Delia can take from 1 October 2013. To do this, they can take the value of Delia’s dependants’ drawdown pension fund on any day in the period 3 August 2013 to 1 October 2013.

Delia’s scheme administrator chooses to use 5 September 2013 to value her dependants’ drawdown pension fund and carry out the calculation of her maximum dependants’ pension. To work out the maximum pension Delia can have, her scheme administrator needs to know:

* how old Delia is on the nominated date
* the yield on 15-year UK gilts from the FTSE UK Gilt Indices on the 15th day of the month before the nominated date, and
* the value of Delia’s dependants’ drawdown pension fund on the nominated date.

The scheme administrator knows that Delia is 75 years old on 5 September 2013. The value of Delia’s dependants’ drawdown pension fund on that day is £60,000. The other piece of information that Delia’s scheme administrator needs is the 15-year UK gilt FTSE percentage for 15 August 2013. This must be rounded down to the nearest 0.25 per cent. The relevant gilt yield is 3.75 per cent.

Using the male GAD table, this gives an amount of £88 pension per £1,000 dependants’ drawdown pension fund. Delia’s new basis amount is £5,280 (60,000/1,000 x £88 = £5,280). Delia’s maximum dependants’ drawdown pension is 120 per cent of the £5,280 basis amount, i.e. £6,336. This new maximum dependants’ drawdown pension will take effect from the start of Delia’s new pension year on 1 October 2013. And for drawdown pension year 1 October 2014 onwards, Delia’s maximum dependant’s drawdown pension is 150 per cent of the basis amount (£7,920).

Where the dependant is aged 76 or older at an annual review, the recalculation of the maximum dependants’ drawdown pension works in the same way as above.

Top of page

Dependants’ drawdown pension under several arrangements

Paragraphs 23 to 24B Schedule 28 Finance Act 2004

While the dependant is under 75, it is not possible to change the pension year for an arrangement.

Where they are 75 or over, it may be possible to change the pension year. Because the scheme administrator must calculate the maximum dependants’ drawdown pension for each of the pension arrangements, allowing all the pension arrangements for a dependant in a scheme to have the same pension year may simplify administration. But there is no legislative requirement to align the pension years for the arrangements under the scheme. It is possible to align some arrangements but not others. After alignment, the maximum dependants’ drawdown pension calculations are still carried out separately for each arrangement.

A dependant can change the pension year for an arrangement by asking the scheme administrator to change it so that it matches the drawdown pension year of another arrangement they have under the scheme. They will need the agreement of their scheme administrator. The pension scheme administrator does not have to agree to the request and cannot change the pension year for an arrangement without the dependant’s consent.

The pension year for an arrangement can only be changed once. This is done by bringing the current pension year to an end early. The length of a pension year cannot be increased. The maximum dependants’ drawdown pension will remain the same for the pension year, even though it is shorter than usual.

Example

Christina has benefits under three separate arrangements under the same pension scheme. From each of these arrangements Christina is getting a dependants’ drawdown pension.

Christina originally designated funds into dependants’ drawdown pension under arrangement 1 on 25 September 2011. So the pension year for this arrangement runs from 25 September to 24 September.

Arrangement 2 was designated on 1 December 2011. So the pension year for arrangement 2 runs from 1 December to 30 November.

Arrangement 3 originally had funds designated into dependants’ drawdown pension on 1 July 2013. So the pension year for arrangement 3 runs from 1 July to 30 June.

Christina is 75 on 3 March 2017. So her pension arrangements switch over to annual review of the maximum dependants’ drawdown pension as follows:

* Arrangement 1: 25 September 2017
* Arrangement 2: 1 December 2017
* Arrangement 3: 1 July 2017

Christina wants all her arrangements to have a pension year that runs from 1 July to 30 June. This means she needs to change the pension years for arrangements 1 and 2 so that they match the pension year for arrangement 3.

On 1 February 2018, Christina asks her scheme administrator if she can change the pension years for arrangements 1 and 2 so that they run from 1 July to 30 June. At this point the maximum dependants’ drawdown pensions for each arrangement are as follows:

* Arrangement 1: £10,000 until 24 September 2018
* Arrangement 2: £20,000 until 1 December 2018
* Arrangement 3: £15,000 until 30 June 2018

Christina’s scheme administrator agrees to the pension years for arrangements 1 and 2 being changed to match the pension year of arrangement 3.

The pension year for arrangement 1 will run from 25 September 2017 to 30 June 2018 with a maximum dependants’ drawdown pension of £10,000. On 1 July 2018 a new annual maximum dependants’ drawdown pension will be calculated for arrangement 1.

The pension year for arrangement 2 will run from 1 December 2017 to 30 June 2018 with a maximum dependants’ drawdown pension of £20,000. On 1 July 2018 a new annual maximum dependants’ drawdown pension will be calculated for arrangement 2.

Top of page

Review triggered by specific events

If a dependant is under 75, the following events trigger a recalculation of the maximum dependants’ drawdown pension:

  • using part of the drawdown pension fund to buy a dependants’ annuity (see PTM072200)
  • using part of the dependants’ drawdown pension fund to provide a dependants’ scheme pension (see PTM072100)
  • the dependants’ drawdown pension fund is reduced due to a pension sharing order following the dependant’s divorce
  • the dependant designates more of their funds in an arrangement to provide extra dependants’ drawdown pension under the same arrangement (where they originally only used part of their funds to provide drawdown pension).

These events cannot change the dates of the pension years or the three-year reference period.

The amount of the maximum dependants’ drawdown pension will normally change from the start of the next pension year.

The exception to this rule is where extra funds are designated into a dependants’ drawdown pension fund. If this produces a higher maximum dependants’ drawdown pension the higher amount will apply immediately. However, if it produces a lower maximum, the lower amount will apply from the start of the next pension year.

If the dependant is 75 or over, their maximum dependants’ drawdown pension is re-calculated every pension year anyway. This means that the only other event that triggers a review of the maximum is the designation of more funds to the dependants’ drawdown pension fund (the fourth bullet above).

Top of page

Using drawdown funds to provide other forms of dependants’ pension

Paragraphs 18, 22 and 24 Schedule 28 Finance Act 2004

Dependants’ annuity

The maximum dependants’ drawdown pension will be recalculated if the dependant uses part, or all, of their dependants’ drawdown pension fund to buy a dependants’ annuity.

The new maximum dependants’ drawdown pension will take effect from the start of the next pension year. The maximum dependants’ drawdown pension for the current pension year remains unchanged. The scheme administrator must calculate the new maximum dependants’ drawdown pension as at the date of purchase of the dependants’ annuity. They cannot choose to use another date.

Example

Frank has a dependants’ drawdown pension. His current reference period started on 1 May 2012 and is due to end on 30 April 2015. The basis amount is £8,500 so Frank’s maximum dependants’ drawdown pension is £8,500 for the year ending 30 April 2013, rising to £10,200 for the next year as his maximum drawdown pension for pension year ending 30 April 2014 is 120 per cent of the £8,500 basis amount, and for pension year ending 30 April 2015 the maximum is 150 per cent of the £8,500 basis amount (£12,750).

On 1 February 2013, Frank uses £50,000 of his dependants’ drawdown pension fund to buy a dependants’ annuity. After the annuity purchase, Frank has £75,000 left in his dependants’ drawdown pension fund. The purchase of the dependants’ annuity triggers a recalculation of Frank’s maximum dependants’ drawdown pension.

The calculation must be carried out as at 1 February 2013, the date the annuity was bought. The scheme administrator cannot choose to use another day. Frank’s scheme administrator used the GAD tables to work out the new maximum drawdown pension using the following information

* the fund value after the annuity purchase (£75,000)
* Frank’s age on 1 February 2013 (66), and
* the 15-year UK gilt yield percentage for 15 January 2013 (4.5 per cent).

The revised basis amount is £5,325. Frank’s maximum drawdown pension based on this amount will apply from the start of the next pension year on 1 May 2013 and will be 120 per cent of the £5,325 basis amount, i.e. £6,390. So until 30 April 2013 Frank can still be paid a dependants’ drawdown pension based on the old maximum amount of £8,500.

The reference period remains the same; it will end on 30 April 2015. At the start of the new reference period Frank’s scheme administrator will calculate a new maximum dependants’ drawdown pension for Frank.

Dependants’ short-term annuity

The dependant can if they wish to buy a dependants’ short-term annuity contract using only part of their dependants’ drawdown pension fund. See PTM072340 for more information on dependants’ short-term annuities.

If the dependant is not taking flexible drawdown from the arrangement, the amount of dependants’ capped drawdown pension they can get will be limited by any payment they receive from a dependants’ short-term annuity contract. Payments made from a dependants’ short-term annuity contract purchased with money from the dependants’ drawdown pension fund paying the dependants’ capped drawdown pension are deducted from the maximum drawdown pension. The amount remaining is the maximum amount that can be paid from the fund as dependants’ capped drawdown pension.

Dependants’ scheme pension

The maximum dependants’ drawdown pension will be recalculated if the dependant uses part, or all, of their dependants’ drawdown pension fund to provide a dependants’ scheme pension. The scheme administrator must calculate the new maximum dependants’ pension as at the date the scheme pension is provided. They cannot choose to use another date.

The maximum dependants’ drawdown pension for the current pension year remains the same, and the new maximum takes effect from the following pension year.