PTM072420 - Death benefits: types of pension: beneficiary's flexi-access drawdown from 6 April 2015: a beneficiary's short-term annuity from 6 April 2015
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Glossary |
Overview
Conditions for a beneficiary’s short-term annuity
Purchase from a dependants’ capped drawdown pension fund
Transfer of short-term annuity
Taxation of a short-term annuity
Overview
Paragraphs 20, 27C and 27H Schedule 28 Finance Act 2004
The Registered Pension Schemes (Transfers of Sums and Assets) Regulations 2006 - SI 2006/499
As long as the scheme rules allow it, a beneficiary may use some of their beneficiary’s flexi-access drawdown (or dependants' drawdown pension fund) to buy a beneficiary’s short-term annuity from an insurance company.
Beneficiary’s short-term annuity drawdown pension is the collective name given to short-term annuities payable to either a dependant, nominee or successor.
A short-term annuity pension payable to a dependant is called dependants’ short-term annuity. It is purchased from the dependant’s flexi-access drawdown fund or dependants’ drawdown pension fund.
A short-term annuity pension payable to a nominee is called nominees’ short-term annuity. It is purchased from the nominee’s flexi-access drawdown fund.
A short-term annuity pension payable to a successor is called successors’ short-term annuity. It is purchased from the successor’s flexi-access drawdown fund.
A beneficiary’s short-term annuity will provide a guaranteed income stream during the term of the annuity. With a beneficiary’s short-term annuity contract, the beneficiary annuity is paid by the insurance company rather than, as for income withdrawal, being paid directly from their dependant’s drawdown pension fund or beneficiary’s flexi-access drawdown fund.
Conditions for a beneficiary’s short-term annuity
Paragraphs 20, 27C and 27H Schedule 28 Finance Act 2004
For guidance relating to a dependants’ short-term annuity to which a dependant became entitled before 6 April 2015 go to PTM072340.
This section of guidance applies only to short-term annuities to which a beneficiary became entitled on or after 6 April 2015.
The beneficiary becomes entitled to a beneficiary’s short-term annuity when they first acquire an actual right to receive the annuity.
An annuity is a beneficiary’s short-term annuity if it is:
- purchased using some or all of the funds representing the beneficiary’s flexi-access drawdown fund or dependant’s capped drawdown pension fund,
- payable by an insurance company, and
- payable for a term not exceeding 5 years and ending before the beneficiary dies.
Where the beneficiary became entitled to the annuity on or after 6 April 2015 the tax rules do not limit the circumstances in which the annuity may reduce. The amount of the annuity can decrease from year to year. Any restriction on the amount is purely a matter for agreement between the parties to the short-term annuity contract.
A beneficiary’s short-term annuity contract cannot provide a benefit after the beneficiary’s death.
There is no upper limit on the amount a short-term annuity may pay if it is purchased using funds from a beneficiary’s flexi-access drawdown fund. However there is an upper limit if the annuity is purchased using funds from a dependant’s capped drawdown pension fund.
Purchase from a dependants’ capped drawdown pension fund
With dependant’s capped drawdown pension there is an annual limit on the total amount of:
- dependant’s income withdrawal, and
- dependant’s short-term annuity
that may be paid from a dependant’s capped drawdown pension fund (see PTM072320).
If the dependant is taking dependant’s capped drawdown their maximum drawdown pension will be reviewed:
- at least every three years if they are under 75, and
- every year when they are 75 or older.
So, in considering the length and amount of a dependant’s short-term annuity contract the dependant may buy, they need to bear in mind that their maximum dependant’s drawdown pension could change part way through the term of the annuity. If their maximum dependant’s drawdown pension goes below the amount payable by their short-term annuity contract, from 6 April 2015 the excess amount will trigger conversion to dependants' flexi-access drawdown.
Transfer of short-term annuities
Paragraphs 20(1B) to (1E), 27C(2) to (4) & 27H(2) to (4) Schedule 28 Finance Act 2004
Regulations 11 and 16 to 18 The Registered Pension Schemes (Transfer of Sums and Assets) Regulation 2006 — SI 2006/499
A beneficiary’s short-term annuity can be transferred from one insurance company to another.
Where there is a transfer of a dependant’s short-term annuity that was in payment before 6 April 2015 and so is subject to restrictions on when the annuity can decrease, special rules apply in respect of the new dependants’ short-term annuity (see PTM106000 for details).
Taxation of a short-term annuity
Before 6 April 2015 payments of dependants’ short-term annuity were taxable as pension income of the recipient.
From 6 April 2015 payment of beneficiary’s short-term annuity may be taxable or it may be paid tax free.
Sections 579A, 579D and 646C(1) and (2) Income Tax (Earnings and Pensions) Act 2003
All types of beneficiary’s short-term annuity are taxable if they are paid in respect of a member (or beneficiary for successors’ short-term annuities) who:
- was aged 75 or older when they died, or
- died before 3 December 2014, at any age.
Payments of a successors’ short-term annuity paid in respect of a beneficiary who died on or after 3 December 2014 aged under 75 are not taxable.
Dependants’ short-term annuity in respect of a member who died aged under 75 on or after 3 December 2014
Sections 579A, 579D and 646C(1) Income Tax (Earnings and Pensions) Act 2003
The legislation starts at section 646C(1) by exempting dependants’ short-term annuities from tax where they are paid in respect of a member who died on or after 3 December 2014 aged under 75. However sections 646C(4) to (6) then disapply that exemption in certain circumstances.
If the annuity doesn’t satisfy the conditions at section 646C(4) to (6) it is not taxable.
Sections 579A, 579D and 646C(6) Income Tax (Earnings and Pensions) Act 2003
Dependants’ short-term annuity purchased from a dependants’ flexi-access drawdown fund will be 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.
Sections 579A, 579D and 646C(5) Income Tax (Earnings and Pensions) Act 2003
Dependants’ short-term annuity purchased from a dependants’ flexi-access drawdown fund will be 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 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.
Sections 579A, 579D and 646C(4) Income Tax (Earnings and Pensions) Act 2003
Dependants’ short-term annuity purchased from a dependants’ drawdown pension fund will be taxable if before 6 April 2015:
- dependants’ income withdrawal was paid from the dependants’ drawdown pension fund, or
- any payment of short-term annuity or dependants’ annuity was made where that annuity was purchased using funds from the dependants’ drawdown pension fund.
In all other circumstances payments made on or after 6 April 2015 of dependants’ short-term annuity payable in respect of member who died on or after 3 December 2014 aged under 75 will be tax free.
Nominees’ short-term annuity in respect of a member who died aged under 75 on or after 3 December 2014
Sections 579A, 579D and 646C(1) Income Tax (Earnings and Pensions) Act 2003
The legislation starts at section 646C(1) by exempting nominees’ short-term annuities from tax where they are paid in respect of a member who died on or after 3 December 2014 aged under 75. However section 646C(6) then disapplies that exemption in certain circumstances.
Nominees’ short-term annuity is taxable if:
- The funds used to purchase the annuity include 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.
Otherwise a nominee’s short-term annuity paid in respect of a member who on or after 3 December 2014 aged under 75 is not taxable. That is where:
- the annuity is not purchased from unused uncrystallised funds held under the nominee’s flexi-access drawdown, or
- the annuity is purchased from a nominee’s flexi-access drawdown holding ‘unused uncrystallised funds' but those funds were designated within the relevant two year period (see above).
Where the short-term annuity is taxable, it is taxable as pension income ‘under a registered pension scheme’. The beneficiary receiving the short-term annuity is liable for income tax on the annuity payments at their marginal rate. The insurance company paying the annuity is required to deduct income tax from the annuity payments, under the PAYE regulations.