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HMRC internal manual

Pensions Tax Manual

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HM Revenue & Customs
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Transfers: Transfer of lifetime annuities and short-term annuities

Glossary PTM000001
   

 

Section 161(3) & (4) Finance Act 2004

Where an insurance company is paying a

  • lifetime annuity, or
  • short-term annuity

the annuity is not being paid directly under a registered pension scheme.

An annuity contract can be transferred from one insurance company to another. This transfer isn’t a recognised transfer because no registered pension scheme is directly involved. However the annuity contract will have been purchased using the sums and assets from a registered pension scheme. Section 161 Finance Act 2004 provides that the payments rules and tax charges apply to payments from an insurance or annuity contract acquired using registered pension scheme funds. As a result where a lifetime or short-term annuity is transferred from one insurance company to another the amount transferred between insurance companies will be an unauthorised payment unless certain conditions are met.

Transfers of lifetime annuities
Transfers of short-term annuities

Transfers of lifetime annuities

Paragraph 3(2B) to (2E) Schedule 28 Finance Act 2004

Regulations 6 and 13 The Registered Pension Schemes (Transfer of Sums and Assets) Regulation 2006 - SI 2006/499

Following the transfer of a lifetime annuity the new insurance company should also pay a lifetime annuity. If the new insurance company applies the transferred funds to provide another type of payment, or it is given to another ‘person’ for example the pension scheme that provided the funds to purchase the original lifetime annuity, the transfer will be an unauthorised payment. The amount of the unauthorised payment will be the total of the sums and assets transferred that was not used by the new insurer to provide a lifetime annuity. The scheme that provided the sums and assets to purchase the original lifetime annuity will be treated as having made the unauthorised payment.

Entitlement to original lifetime annuity arose before 6 April 2015

If the member became entitled to the original lifetime annuity before 6 April 2015 the terms of the new annuity contract should not be capable of providing for decreases in the amount of the annuity other than those provided for by regulations (see PTM062400). If the terms of the annuity contract are capable of providing for such decreases the new annuity is not a lifetime annuity and the amount transferred would be an unauthorised payment. An annuity contract is regarded as being capable of providing decreases to the annuity not only if this is explicitly provided for in the contract, but also if the contract terms allow for a future variation to be made to allow such annuity decreases.

The date of entitlement to the original contract is the date of entitlement from the registered pension scheme. So if for example a member became entitled to a lifetime annuity payable from insurer A on 30 May 2006 using funds from the XYZ pension scheme, then the annuity contract was transferred to insurer B on 30 June 2014 and then transferred to insurer C on 1 October 2016, the date of entitlement to the original lifetime annuity is 30 May 2006.

Where the new insurance company provides a lifetime annuity the new annuity is treated as if it was the original lifetime annuity for specific purposes.

Cessation of original lifetime annuity

The cessation of the lifetime annuity from the original insurance company because of the transfer is not regarded as a surrender for the purposes of section 172A(1) and (2) Finance Act 2004.

No BCE 4 and pension commencement lump sum

The member becoming entitled to a lifetime annuity provided by the new insurance company will not be a BCE 4. The member also can’t become entitled to a pension commencement lump sum because of the transfer. For both purposes the new lifetime annuity is treated as the original lifetime annuity.

Normal minimum pension age

If the transfer took place on or after 6 April 2010 the member is treated as having reaching normal minimum pension age by reference to the day on which the original lifetime annuity was first paid. This for example allows a member who became entitled to benefits before 6 April 2010 aged 50 to 54 (when the normal minimum pension age was 50) to transfer their lifetime annuity benefits to a new insurer whilst they are still under the current normal minimum pension age. Any lifetime annuity payments made by the new scheme whilst the member was under the current normal minimum pension age wouldn’t be unauthorised payments just because the member hadn’t reached the current normal minimum pension age.

Annuity protection lump sum death benefit

For the purposes of calculating the maximum annuity protection lump sum death benefit (see PTM073400) the lifetime annuity paid by the new insurer is treated as if it was the original lifetime annuity. The maximum lump sum will be calculated by reference to the amount crystallised by the original lifetime annuity and annuity payments made under both the original and new lifetime annuity contracts.

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Transfers of short-term annuities

Paragraph 6(1B) to (1E) Schedule 28 Finance Act 2004

Regulations 7 and 14 The Registered Pension Schemes (Transfer of Sums and Assets) Regulation 2006 - SI 2006/499

Following the transfer of a short-term annuity the new insurance company should pay a short-term annuity to the member. If there is no new short-term annuity payable to the member the scheme that provided the sums and assets to purchase the original short-term annuity is treated as having made an unauthorised payment. The amount of the unauthorised payment will be the total of the sums and assets transferred that was not used by the new insurer to provide a short-term annuity.

Entitlement to original short-term annuity arose before 6 April 2015

If the member became entitled to the original short-term annuity before 6 April 2015 the terms of the new annuity contract should not be capable of providing for decreases in the amount of the annuity other than those provided for by regulations (see PTM062400). If the terms of the annuity contract are capable of providing for such decreases the new annuity is not a short-term annuity and the amount transferred would be an unauthorised payment.

The meaning of:

  • the contract being capable of providing for decreases in the level of the annuity, and
  • date of entitlement of the original annuity

are construed in the same manner as for a lifetime annuity - see the guidance on Transfers of lifetime annuities above.

Tax treatment after the transfer

Where the transfer took place on or after 6 April 2010 the new short-term annuity is treated as if it was the original short-term annuity for the purpose of deciding if the member has reached their normal minimum pension age. So if

  • the member had reached their normal minimum pension age when the original short-term annuity was purchased,
  • the normal minimum pension age was subsequently increased, and
  • when the member’s short-term annuity was transferred they had not yet reached the new normal minimum pension age

the member is regarded as having reached their minimum pension age for the purpose of the replacement short-term annuity.