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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 dependant had designated funds in an arrangement into a dependant’s capped drawdown pension fund before 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
Payment of excessive dependant’s drawdown pension
The scheme administrator agreeing to a request for conversion
Conversion to dependants’ flexi-access drawdown following a transfer of the funds held in a dependants’ drawdown pension fund
Taxation

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

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

The remainder of this page contains further guidance on each of these events.

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Payment of excessive dependant’s drawdown pension

Paragraph 22B Schedule 28 Finance Act 2004

If at any time on or after 6 April 2015:

  • there is a payment of dependant’s income withdrawal or of a dependant’s short-term annuity purchased with sums or assets held in the fund, and
  • that payment results in the maximum capped drawdown pension the dependant can take from the fund being exceeded (see PTM072330 for more detail)

then the fund is treated as though, immediately before the payment is made, it had only been newly designated as available for the provision of drawdown pension. This means that the dependant’s capped drawdown fund is treated as having become a dependant’s flexi-access drawdown fund immediately before the payment is made, so the payment is treated as having been made from a dependant’s flexi-access drawdown pension fund and is therefore an authorised payment.

Because the payment of dependant’s capped drawdown pension has become a payment of dependant’s flexi-access drawdown pension, it is no longer excessive (as there is no limit on the amount that can be paid as dependant’s flexi-access drawdown pension).

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The scheme administrator agreeing to a request for conversion

Paragraph 22C Schedule 28 Finance Act 2004

A dependant with a dependant’s capped drawdown pension fund may at any time notify their scheme administrator that they wish their fund to become a flexi-access drawdown fund in respect of the arrangement holding the fund. This notification may have been (but does not have to be) given to the scheme administrator before 6 April 2015.

The scheme administrator does not have to accept the notification. If they do not then the dependant will continue in dependants’ capped drawdown (see PTM072320 onwards for more details about dependants’ capped drawdown) unless another event leading to conversion from dependants’ capped to dependants’ flexi-access drawdown occurs.

If the scheme administrator accepts the notification, the dependant’s capped drawdown fund becomes a dependants’ flexi-access drawdown fund from the later of the date the scheme administrator accepts the notification and the start of 6 April 2015.

The dependants’ flexi-access drawdown rules will then apply.

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Conversion to dependants’ flexi-access drawdown following a transfer of the funds held in a dependants’ drawdown pension fund

Paragraph 22D Schedule 28 Finance Act 2004

From 6 April 2015, where a dependant makes a recognised transfer from one registered pension scheme to another (see PTM100010) of the sums and assets held in a dependants’ capped drawdown pension fund and the transferred sums and assets are designated under the arrangement in the new scheme as being available for the payment of dependants’ drawdown pension, the dependant has two options:

  • the dependant can notify the scheme administrator of the scheme receiving the transfer that they wish the sums or assets to become newly-designated funds. The dependant can give their notification before or at the time they designate the funds in the receiving scheme as available for the payment of dependants’ drawdown pension. The scheme administrator cannot refuse to accept the notification. The sums and assets become newly designated funds on the latest of 6 April 2015, the date the designation is made and the date of the transfer. On the date the funds become newly designated funds, the sums and assets become held in a dependants’ flexi-access drawdown fund, or
  • the dependant does not give any such notification, and continues to take dependants’ capped drawdown pension from their new arrangement in the receiving scheme.

See PTM104000 for more details about transfers of dependant’s drawdown pension and PTM072300 onwards for information about paying dependant’s drawdown pension.

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Taxation

Sections 579A and 579CZA(1)and(5) Income Tax (Earnings and Pensions) Act 2003

The dependant’s flexi-access pension is taxable as pension income where it is paid

  1. in respect of a deceased member who had reached age 75 at the date of their death, or 
  2. in respect of a deceased member who had not reached age 75 at the date of their death and where all of the following apply:
  • the dependant’s flexi-access drawdown fund includes either sums or assets that on 5 April 2015 were held in a dependant’s capped drawdown pension fund and were converted into newly-designated dependant funds on or after 6 April 2015 (see above) and/or sums or assets deriving (directly or indirectly) from the dependant’s capped drawdown fund’s sums or assets,
  • the dependant had received a payment of dependant’s drawdown pension from the dependant’s drawdown pension fund before 6 April 2015, and
  • any of the sums and assets in the dependant’s drawdown pension fund at the time of that pension payment to any extent make up or are represented by the flexi-access drawdown fund’s sums or assets.

In such a case, the dependant’s flexi-access drawdown payments are taxable 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.