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HMRC internal manual

Pensions Tax Manual

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Death benefits: types of pension: beneficiary's flexi-access drawdown from 6 April 2015: where a beneficiary had not designated funds in an arrangement into a drawdown pension fund before 6 April 2015

Glossary PTM000001
   

 

Establishing a beneficiary’s flexi-access drawdown fund
Lifetime allowance consequences
Beneficiary’s flexi-access drawdown benefits
Taxation of a beneficiary’s flexi-access drawdown pension

Establishing a beneficiary’s flexi-access drawdown fund

Paragraphs 21-22A, 27B-27E and 27G-27K Schedule 28 Finance Act 2004

A beneficiary wishing to take their pension benefits as beneficiary’s drawdown pension must designate sums and assets in a money purchase arrangement as being available for drawdown pension.

Where the beneficiary is a dependant, the sums and assets designated must not have been designated by them before 6 April 2015 (though the member’s death may be before that date).

Where the beneficiary is a nominee, the designated sums and assets must represent either uncrystallised funds or unused drawdown funds.

Where the beneficiary is a successor, the designated sums and assets must represent unused drawdown funds.

Unused drawdown funds are funds which immediately before the member’s (or previous beneficiary’s) death were held in that person’s drawdown pension fund or flexi-access drawdown fund in the arrangement, or which arise or derive from such funds.

Where the beneficiary is a dependant who is making a designation on or after 6 April 2015 and did not have an existing dependant’s drawdown pension fund on 5 April 2015, they must designate the sums and assets as available for the payment of drawdown pension in a new drawdown fund, known as a dependant’s flexi-access drawdown fund. The sums or assets designated for beneficiary’s flexi-access drawdown are called ‘newly-designated funds’.

Lifetime allowance consequences

Section 216 Finance Act 2004

There is a BCE 5C and the amount designated is tested against the member’s available lifetime allowance when:

  • a dependant or a nominee of the member designates relevant unused uncrystallised funds as being available for the payment of flexi-access drawdown pension to the dependant or nominee, and
  • that designation occurs within two years of the day when the scheme administrator first knows (or could reasonably have been expected to know) of the member’s death, and
  • the member was aged under 75 when they died.

See PTM088660 for more detail.

Where the designation takes place after the two-year period has expired or where the member died on or after reaching age 75, there are no lifetime allowance consequences but the tax treatment of the payments of flexi-access drawdown pension is different (see below).

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Beneficiary’s flexi-access drawdown benefits

A beneficiary can take benefits from their flexi-access drawdown fund as drawdown pension in the form of either a short-term annuity (see PTM072420) or income withdrawal.

If the beneficiary chooses income withdrawal from their flexi-access drawdown fund, they can take as much or as little from it as they like each year regardless of whether or not they have any other income or, if they do, the level of that income.

 

Alternatively, subject to the rules of the scheme, a beneficiary can at any time use their drawdown pension fund or flexi-access drawdown fund (as appropriate) to secure a pension by purchase of a beneficiary’s annuity - see PTM072200.

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Taxation of a beneficiary’s flexi-access drawdown pension

Section 167(3) and paragraph 27E(4) and (5) Schedule 28 Finance Act 2004

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

A beneficiary’s income withdrawal is not taxable as pension income if:

  • it is paid from a dependant’s drawdown pension fund or from a dependant’s or nominee’s flexi-access drawdown pension under a money purchase arrangement and it is paid in respect of the deceased member of a registered pension scheme who died before reaching age 75, or
  • it is a successor’s flexi-access drawdown pension under a money purchase arrangement and it is paid in respect of a deceased beneficiary of a deceased member of a registered pension scheme and the beneficiary died before reaching age 75.

But the beneficiary’s income withdrawal is taxable if:

  • relevant unused uncrystallised funds are designated on or after 6 April 2015 as available for the payment of dependants’ or nominees’ drawdown pension, and
  • the funds make up (to any extent) a dependants’ or nominees’ flexi-access drawdown fund under a money purchase arrangement, and
  • the designation does not occur until more than two years after the day on which the scheme administrator first knew (or could reasonably have been expected to know) of the member’s death.

The payment is taxable to the extent that it is paid in respect of sums or assets which at that time represented the whole or any part of the relevant unused uncrystallised funds. Relevant unused uncrystallised funds are unused uncrystallised funds of a member who died before reaching age 75.

In the case of a cash balance arrangement (see PTM023000 onwards for more detail), funds are unused uncrystallised funds if:

  • they are sums or assets held for the purposes of the arrangement representing the whole or any part of the sum which would have been available immediately before the member’s death for the provision of benefits to or in respect of the member as if the member had become entitled to all their pension benefits under the arrangement they were not already entitled to immediately before they died, and
  • they have not, since the member’s death been designated as available for the payment of nominees’ drawdown pension nor applied towards the provision of a dependants’ annuity or scheme pension.

In the case of an other money purchase arrangement (see PTM023000 onwards for more detail) unused uncrystallised funds are sums or assets held for the purposes of the arrangement which immediately before the member’s death were held for the purposes of the arrangement and at that time:

  • were not either member-designated funds or newly-designated funds, and
  • had not been applied towards the purchase of a scheme pension or a dependants’ scheme pension, or
  • the sums or assets are derived either directly or indirectly from unused uncrystallised funds set out in the two previous bullet points or from sums or assets which so arise or derive,

and in all cases have not since the member’s death been designated as available for the provision of a dependants’ or nominees’ drawdown pension nor been applied towards the provision of a dependants’ annuity/or scheme pension.

Additionally, a payment from a dependant’s drawdown pension fund made after 5 April 2015 is taxable as pension income if before 6 April 2015:

  • the dependant received any payment of dependants’ income withdrawal from the drawdown fund (or any fund represented to any extent by the drawdown fund), or
  • the dependant received a payment of a short-term annuity purchased using sums or assets from the drawdown fund (or any fund represented to any extent by the drawdown fund).

Where a beneficiary’s income withdrawal is taxable as pension income, it is taxed at their marginal rate in the tax year in which the income withdrawal is paid. The scheme administrator is required to deduct income tax from the income withdrawal under the PAYE regulations.

A beneficiary’s income withdrawal is taxable if it is paid in respect of:

  • the deceased member of a registered pension scheme who died aged 75 or over; or
  • a deceased beneficiary of a deceased member of a registered pension scheme who died aged 75 or over.

It is taxable at the recipient’s marginal rate of income tax.