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HMRC internal manual

Pensions Tax Manual

Death benefits: types of pension: dependants’ drawdown pension: dependants’ capped drawdown pension from 6 April 2015

Glossary PTM000001
   

Continuing in dependants’ capped drawdown
Conversion of a dependants’ capped drawdown pension fund into a dependants’ flexi-access drawdown fund
Children of the member reaching age 23
Taxation of continuing capped drawdown pension

 

Continuing in dependants’ capped drawdown

A dependant who was in dependant’s capped drawdown on 5 April 2015 may choose either to continue in dependant’s capped drawdown or to convert to dependant’s flexi-access drawdown. The dependant’s capped drawdown rules continue to apply automatically, unless there is a conversion.

For so long as the dependant opts to remain in dependant’s capped drawdown and there is no conversion event, the dependant’s drawdown pension fund rules continue to apply to the dependant’s drawdown pension fund. Briefly, this means that the existing dependant’s drawdown pension fund continues to be used to provide dependant’s capped drawdown pension. Any further funds designated after 6 April 2015 in the arrangement will be designated to the dependant’s existing dependant’s capped drawdown pension fund. The limit on the maximum amount of pension the dependant can draw each year will continue to apply as will all the other dependant’s capped drawdown pension rules. For details on the dependant’s capped drawdown pension rules (see PTM072320 onwards).

Conversion of a dependants’ capped drawdown pension fund into a dependants’ flexi-access drawdown fund

Paragraphs 22B to 22D Schedule 28 Finance Act 2004

If, on 5 April 2015, the dependant’s existing dependants’ drawdown pension fund was paying a dependants’ capped drawdown pension (see above for the position where the dependant instead qualified for dependants’ flexible drawdown) certain events occurring after that date will result in the dependants’ capped drawdown pension fund being converted into a dependants’ flexi-access drawdown fund. These events are:

  • the payment of excessive dependants’ drawdown pension
  • the scheme administrator agreeing to a request for conversion
  • certain transfers.

For further guidance on each of these events see PTM072450.

Children of the member reaching age 23

Paragraph 15 Schedule 28 Finance Act 2004

Paragraph 6 Schedule 5 Finance Act 2016

Where a child of the member

  • qualifies as a dependant because they are aged under 23 (rather than through mental or physical impairment)
  • first designated funds into a capped drawdown fund before 6 April 2015 and
  • reaches age 23 on or after 16 September 2016

they can continue to receive dependants’ income withdrawal or a short-term annuity from capped drawdown as authorised payments regardless of their age.

Taxation of continuing capped drawdown pension

Sections 579A and 579CZA(1) and (4) Income Tax (Earnings and Pensions) Act 2003

The dependants’ capped drawdown pension is taxable as pension income unless:

  1. it is paid on or after 6 April 2015, and
  2. it is in respect of a deceased member who had not reached age 75 at the date of their death, and
  3. no payments of income withdrawal or short-term annuity were made from the dependants’ capped drawdown fund (or any fund represented by the capped drawdown fund) before 6 April 2015.

Where taxable, the dependants’ capped drawdown payments are taxed at the dependant’s marginal rate as pension income in the tax year in which they are paid. The scheme administrator is required to deduct income tax from the payments, under the PAYE regulations.