PTM072410 - Death benefits: types of pension: beneficiary’s flexi-access drawdown from 6 April 2015: overview and changes from 6 April 2015

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Beneficiary’s drawdown pension
Flexi-access drawdown or capped drawdown pension?
Conditions for paying a beneficiary’s drawdown pension
Types of authorised payments from a beneficiary’s drawdown fund
Beneficiary’s short-term annuity
Beneficiary’s income withdrawal
Beneficiary’s drawdown pension and the lifetime allowance
Taxation of beneficiary’s drawdown pension payments from 6 April 2015
Transferring a beneficiary’s drawdown pension

Paragraphs 18, 21, 27B and 27G Schedule 28 Finance Act 2004

The tax rules for drawdown pensions changed from 6 April 2015 to allow greater flexibility in paying pensions following a member’s death.

From 6 April 2015, in addition to a dependant, a drawdown pension 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.

From 6 April 2015, a beneficiary’s drawdown pension continues to comprise both a short-term annuity and income withdrawal but the nature of both these types of drawdown pension has changed.

Beneficiary’s drawdown pension

Section 167 Finance Act 2004

Beneficiary’s drawdown pension is the collective name given to drawdown pension payable to either a dependant, nominee or successor.

Drawdown pension payable to a dependant is called dependants’ drawdown pension.

Drawdown pension paid to a nominee is called nominees’ drawdown pension.

Drawdown pension paid to a successor is called successors’ drawdown pension.

Flexi-access drawdown or capped drawdown pension?

From 6 April 2015 drawdown pension is available as:

  • flexi-access, or
  • capped drawdown.

Nominees’ and successors’ drawdown pension are available only as flexi-access drawdown.

Dependants’ drawdown pension may be paid as flexi-access drawdown or capped drawdown pension.

With flexi-access drawdown there is no minimum or maximum amount that a beneficiary can take in any tax year. The beneficiary can choose to draw as much or as little pension as they like in any year. Subject to what the pension scheme rules allow, in any year the beneficiary can choose to take:

  • no payment of drawdown pension,
  • a regular series of payments,
  • an irregular payment stream, or
  • their whole flexi-access drawdown fund as a single payment.

Dependants’ drawdown will be dependants’ flexi-access drawdown if:

  • the dependant first designated funds under an arrangement on or after 6 April 2015
  • before 6 April 2015, a dependant had designated funds into one or more dependants’ drawdown funds from which they were taking flexible drawdown. On 6 April 2015 these funds automatically became dependant’s flexi-access drawdown funds. See PTM072440 for more detail.
  • before 6 April 2015, a dependant had designated funds into one or more dependants’ drawdown pension funds from which they were taking dependants’ capped drawdown pension and later converted to dependants’ flexi-access drawdown. PTM072450 provides guidance on how a dependant can convert from capped to flexi-access drawdown.

A dependant’s drawdown pension will be ‘capped drawdown’ where all the following conditions are met:

  • the dependant first designated funds under the arrangement to provide drawdown pension before 6 April 2015
  • on 5 April 2015 that drawdown pension was payable as capped drawdown, and
  • the dependant has not converted their dependants’ drawdown pension fund to dependants’ flexi-access drawdown.

With capped drawdown there is no minimum amount that must be taken each year but there is a maximum amount. Regular review of the dependants’ drawdown pension fund need to be made to establish the maximum annual amount of drawdown pension payable from that dependants’ drawdown pension fund.

For dependants’ with capped drawdown pension the guidance at PTM072320 continues to apply to their dependants’ drawdown pension funds after 5 April 2015.

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Conditions for paying a beneficiary’s drawdown pension

A beneficiary’s drawdown pension can be paid only from a money purchase arrangement. Defined benefits arrangement cannot pay drawdown pension of any form. Pension schemes do not have to pay benefits to a beneficiary as drawdown pension. Many schemes do not offer this option.

There is no lower or upper age limit for paying a beneficiary’s’ drawdown pension.

Dependants’ drawdown pension

Paragraphs 22 and 22A Schedule 28 Finance Act 2004

Paragraph 15(2A) Schedule 28 Finance Act 2004 and paragraph 6(5) Schedule 5 Finance Act 2016

Dependants’ drawdown pension may be paid only following the death of a member. It is payable only to a dependant of the member. PTM071200 provides guidance on who can be a dependant.

The dependant starts starts drawdown pension by designating sums and assets under a money purchase arrangement as available to be provide them with drawdown pension. An arrangement can hold only one drawdown fund.

Where the first designation under the arrangement occurs on or after 6 April 2015, the designation creates a dependant’s flexi access drawdown fund. PTM072430 provides more information about this process where the first designation under an arrangement takes place on or after 6 April 2015.

Where the first designation under the arrangement occurred before 6 April 2015, the designation created a dependants’ drawdown pension fund.

A drawdown pension payable to an individual who is a dependant because they are a child aged under 23 (rather than through mental or physical impairment), may continue to be paid after that child reaches age 23 if:

  • funds were first designated as available to provide dependants’ drawdown pension for that child before they were 23, and
  • the child reaches age 23 on or after 16 September 2016.

Nominee’s drawdown pension

Paragraph 27E Schedule 28 Finance Act 2004

A nominee’s drawdown pension is payable only to a nominee of the member. PTM071300 provides guidance on who can be a nominee. This pension may be paid only following the death of a member. It may be paid in respect of a member who died before 5 April 2015.

The nominee starts drawdown pension by designating sums and assets under a money purchase arrangement as available to provide them with drawdown pension. This designation creates a nominee’s flexi-access drawdown fund. The sums and assets designated to create that fund must be ‘unused uncrystallised fund’ or ‘unused drawdown funds’. PTM072430 provides more guidance about these terms and how a nominee’s drawdown pension is put into payment.

Successor’s drawdown pension

Paragraph 27K Schedule 28 Finance Act 2004

A successor’s drawdown pension is payable only to a successor of the member. PTM071300 provides guidance on who can be a successor. This pension may be paid following the death of a dependant, nominee or another successor of the member. It may be paid in respect of a dependant member who died before 5 April 2015.

The successor starts drawdown pension by designating sums and assets under a money purchase arrangement as available to provide them with drawdown pension. This designation creates a successor’s flexi-access drawdown fund. The sums and assets designated to create that fund must be ‘unused drawdown funds’ of the deceased dependant, nominee or successor. PTM072430 provides more guidance about this term and how a successor’s drawdown pension is put into payment.

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Types of authorised payments from a beneficiary’s drawdown fund

Whether the pension is flexi-access drawdown or capped drawdown, drawdown pension can be paid as either or both:

  • short-term annuities, or
  • income withdrawal.

Apart from paying drawdown pension, a beneficiary can choose to use all or part of their drawdown pension fund or flexi-access drawdown fund (as appropriate) to:

  • purchase a beneficiary’s annuity (see PTM072200), or
  • provide a dependants’ scheme pension – if the beneficiary is a dependant.

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Beneficiary’s short-term annuity

With a beneficiary’s short-term annuity some of the beneficiary’s flexi-access drawdown (or dependants’ drawdown pension fund) will be used to buy an annuity contract from an insurance company. This annuity contract will pay the beneficiary a certain income each year for a fixed period of up to five years.

The rules on when the annual amount of a short-term annuity may go down have changed. The new rules apply to short-term annuities purchased on or after 6 April 2015.

Payments under a dependants’ short-term annuity contract purchased on or after 16 September 2016 for a child dependant may be paid to a child aged 23 or older.

Go to PTM072420 for full guidance on beneficiary’s short-term annuity contracts purchased on or after 6 April 2016.

For guidance on dependants’ short-term annuity contract purchased before 6 April 2015 go to PTM072340.

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Beneficiary’s income withdrawal

With beneficiary’s income withdrawal, a pension is paid to the beneficiary directly from the funds in their flexi-access drawdown fund (or dependant’s’ drawdown pension fund).

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 dependants’ drawdown pension fund or flexi-access drawdown fund before age 23, and
  • reaches age 23 on or after 16 September 2016

they can continue to receive dependants’ income withdrawal as authorised payments regardless of their age.

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Beneficiary’s drawdown pension and the lifetime allowance

Section 216, BCE 5C and paragraphs 14B and 14C Schedule 32 Finance Act 2004

From 6 April 2015 if a dependant or nominee designates funds into flexi-access drawdown, this may be a benefit crystallisation event, a BCE 5C. A lifetime allowance charge may arise as a result of the designation. Not every designation by a dependant or nominee will be a crystallisation event.

A designation by a successor into a successor’s flexi access drawdown fund is not a benefit crystallisation event.

PTM072430 provides more guidance on the lifetime allowance consequences when a beneficiary designates funds into flexi-access drawdown on or after 6 April 2015.

PTM088660 provides detailed guidance on BCE 5C.

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Taxation of beneficiary’s drawdown pension payments from 6 April 2015

Before 6 April 2015 payments of dependants’ drawdown pensions were taxable as pension income of the dependant.

From 6 April 2015 beneficiary’s drawdown pension may be tax free or it may be taxable as pension income. The tax treatment of the pension depends on a number of a factors including the age of the member or prior beneficiary when they died, how long it takes to put the benefit into payment and whether or not payments had been made before 6 April 2015.

PTM072430 provides details of the tax treatment of funds designated into flexi-access drawdown on or after 6 April 2015

PTM072440 provides guidance on the tax treatment of pension taken as dependants’ flexible drawdown pension before 6 April 2015

PTM072450 provides guidance if dependants’ capped drawdown pension was provided immediately before 6 April 2015.

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Transferring a beneficiary’s drawdown pension

Section 169(1D) Finance Act 2004

Regulation 12 The Registered Pension Schemes (Transfer of Sums and Assets) Regulations — SI 2006/499

A beneficiary may transfer their benefits in payment to another registered pension scheme. The transfer will be an unauthorised payment if it does not meet the following conditions:

  • the transfer must be made to a new ‘empty’ pension arrangement, and
  • the benefits must be provided on a like-for-like basis. So, for example, if the dependants’ drawdown pension is being provided as a dependants’ short-term annuity, it must continue to be paid as a dependants’ short-term annuity or if the dependants’ drawdown pension is being provided as income withdrawal, it must continue to be paid as income withdrawal.

If the beneficiary’s pension is dependants’ capped drawdown that started before 6 April 2011, the transfer can trigger a review of the maximum amount of dependants’ drawdown pension available

If the dependants’ capped drawdown pension started on or after 6 April 2011, the maximum amount of dependants’ drawdown pension a dependant can get will not change on the transfer.

PTM104000 provides guidance on the transfer of beneficiary’s drawdown pension between pension schemes.

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