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

PTM000001

Overview
Conditions for a ²ú±ð²Ô±ð´Ú¾±³¦¾±²¹°ù²â바카라 사이트™s short-term annuity
Purchase from a »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ 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 ²ú±ð²Ô±ð´Ú¾±³¦¾±²¹°ù²â바카라 사이트™s flexi-access drawdown (or dependants' drawdown pension fund) to buy a ²ú±ð²Ô±ð´Ú¾±³¦¾±²¹°ù²â바카라 사이트™s short-term annuity from an insurance company.  

Beneficiary바카라 사이트™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 »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ short-term annuity. It is purchased from the »å±ð±è±ð²Ô»å²¹²Ô³Ù바카라 사이트™s flexi-access drawdown fund or »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ drawdown pension fund.

A short-term annuity pension payable to a nominee is called nominees바카라 사이트™ short-term annuity.  It is purchased from the nominee바카라 사이트™s flexi-access drawdown fund.

A short-term annuity pension payable to a successor is called ²õ³Ü³¦³¦±ð²õ²õ´Ç°ù²õ바카라 사이트™ short-term annuity.  It is purchased from the successor바카라 사이트™s flexi-access drawdown fund.

A ²ú±ð²Ô±ð´Ú¾±³¦¾±²¹°ù²â바카라 사이트™s short-term annuity will provide a guaranteed income stream during the term of the annuity. With a ²ú±ð²Ô±ð´Ú¾±³¦¾±²¹°ù²â바카라 사이트™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 dependant바카라 사이트™s drawdown pension fund or ²ú±ð²Ô±ð´Ú¾±³¦¾±²¹°ù²â바카라 사이트™s flexi-access drawdown fund.

Conditions for a ²ú±ð²Ô±ð´Ú¾±³¦¾±²¹°ù²â바카라 사이트™s short-term annuity

Paragraphs 20, 27C and 27H Schedule 28 Finance Act 2004

For guidance relating to a »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ 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 ²ú±ð²Ô±ð´Ú¾±³¦¾±²¹°ù²â바카라 사이트™s short-term annuity when they first acquire an actual right to receive the annuity.

An annuity is a ²ú±ð²Ô±ð´Ú¾±³¦¾±²¹°ù²â바카라 사이트™s short-term annuity if it is:

  • purchased using some or all of the funds representing the ²ú±ð²Ô±ð´Ú¾±³¦¾±²¹°ù²â바카라 사이트™s flexi-access drawdown fund or »å±ð±è±ð²Ô»å²¹²Ô³Ù바카라 사이트™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 ²ú±ð²Ô±ð´Ú¾±³¦¾±²¹°ù²â바카라 사이트™s short-term annuity contract cannot provide a benefit after the ²ú±ð²Ô±ð´Ú¾±³¦¾±²¹°ù²â바카라 사이트™s death.

There is no upper limit on the amount a short-term annuity may pay if it is purchased using funds from a ²ú±ð²Ô±ð´Ú¾±³¦¾±²¹°ù²â바카라 사이트™s flexi-access drawdown fund.  However there is an upper limit if the annuity is purchased using funds from a »å±ð±è±ð²Ô»å²¹²Ô³Ù바카라 사이트™s capped drawdown pension fund.

Purchase from a »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ capped drawdown pension fund

With »å±ð±è±ð²Ô»å²¹²Ô³Ù바카라 사이트™s capped drawdown pension there is an annual limit on the total amount of:

  • »å±ð±è±ð²Ô»å²¹²Ô³Ù바카라 사이트™s income withdrawal, and
  • »å±ð±è±ð²Ô»å²¹²Ô³Ù바카라 사이트™s short-term annuity

that may be paid from a »å±ð±è±ð²Ô»å²¹²Ô³Ù바카라 사이트™s capped drawdown pension fund (see PTM072320).

If the dependant is taking »å±ð±è±ð²Ô»å²¹²Ô³Ù바카라 사이트™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 »å±ð±è±ð²Ô»å²¹²Ô³Ù바카라 사이트™s short-term annuity contract the dependant may buy, they need to bear in mind that their maximum »å±ð±è±ð²Ô»å²¹²Ô³Ù바카라 사이트™s drawdown pension could change part way through the term of the annuity. If their maximum »å±ð±è±ð²Ô»å²¹²Ô³Ù바카라 사이트™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.

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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 바카라 사이트” SI 2006/499

A ²ú±ð²Ô±ð´Ú¾±³¦¾±²¹°ù²â바카라 사이트™s short-term annuity can be transferred from one insurance company to another.

Where there is a transfer of a »å±ð±è±ð²Ô»å²¹²Ô³Ù바카라 사이트™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 »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ short-term annuity (see PTM106000 for details).

Taxation of a short-term annuity

Before 6 April 2015 payments of »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ short-term annuity were taxable as pension income of the recipient. 

From 6 April 2015 payment of ²ú±ð²Ô±ð´Ú¾±³¦¾±²¹°ù²â바카라 사이트™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 ²ú±ð²Ô±ð´Ú¾±³¦¾±²¹°ù²â바카라 사이트™s short-term annuity are taxable if they are paid in respect of a member (or beneficiary for ²õ³Ü³¦³¦±ð²õ²õ´Ç°ù²õ바카라 사이트™ short-term annuities) who:

  • was aged 75 or older when they died, or
  • died before 3 December 2014, at any age.

Payments of a ²õ³Ü³¦³¦±ð²õ²õ´Ç°ù²õ바카라 사이트™ short-term annuity paid in respect of a beneficiary who died on or after 3 December 2014 aged under 75 are not taxable.

Dependants바카라 사이트™ 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 »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ 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 doesn바카라 사이트™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

Dependants바카라 사이트™ short-term annuity purchased from a »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ flexi-access drawdown fund will be taxable if:

  • any of the funds designated to create that flexi-access drawdown fund included the member바카라 사이트™s 바카라 사이트˜unused uncrystallised funds바카라 사이트™ (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 member바카라 사이트™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

Dependants바카라 사이트™ short-term annuity purchased from a »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ flexi-access drawdown fund will be taxable if:

  • any sums and assets in that flexi-access fund derive from a »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ drawdown pension fund, and
  • before 6 April 2015 »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ income withdrawal was paid from the »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ drawdown pension fund or payments of »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ short -term annuity or »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ annuity were made where that annuity was purchased using funds from the »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ drawdown pension fund.

Funds under a »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ flexi-access drawdown fund will derive from a »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ 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 바카라 사이트“ 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

Dependants바카라 사이트™ short-term annuity purchased from a »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ drawdown pension fund will be taxable if before 6 April 2015:

  • »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ income withdrawal was paid from the »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ drawdown pension fund, or
  • any payment of short-term annuity or »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ annuity was made where that annuity was purchased using funds from the »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ drawdown pension fund.

In all other circumstances payments made on or after 6 April 2015 of »å±ð±è±ð²Ô»å²¹²Ô³Ù²õ바카라 사이트™ short-term annuity payable in respect of member who died on or after 3 December 2014 aged under 75 will be tax free.

Nominees바카라 사이트™ 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 nominees바카라 사이트™ 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.

Nominees바카라 사이트™ short-term annuity is taxable if:

  • The funds used to purchase the annuity include the member바카라 사이트™s 바카라 사이트˜unused uncrystallised funds바카라 사이트™ (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 member바카라 사이트™s death, or the day they could first reasonably have been expected to know of it.

Otherwise a nominee바카라 사이트™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 nominee바카라 사이트™s flexi-access drawdown, or
  • the annuity is purchased from a nominee바카라 사이트™s flexi-access drawdown holding 바카라 사이트˜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 바카라 사이트˜under a registered pension scheme바카라 사이트™.  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.