NIM02768 - Class 1 NICs: earnings of employees and office holders: retirement benefits schemes from 6th April 2006: employer-financed retirement benefits schemes: payments from such schemes: authorised member payments: pensions: pension rule 4

Paragraphs 8(b) and 10 of Part 6 of Schedule 3 to the Social Security (Contributions) Regulations 2001 (as inserted by regulation 8(7) of the Social Security (Contributions)(Amendment No. 2) Regulations 2006)

Sections 152(6)-(7), 165(1), 279(1) of, and paragraph 1 of Schedule 28 to, Finance Act 2004

Pension rule 4 referred to in NIM02766 as follows:

Pension rule 4

The only types of pension that may be paid in respect of a money purchase arrangement are:

  • a scheme pension, so long as the individual has had the opportunity to select a lifetime annuity instead
  • a lifetime annuity; or
  • drawdown pension.

Here:

  • “scheme pension” has the same meaning as in pension rule 3 (paragraph 2(2)(a) of Schedule 28; NIM02767 and PTM062310)
  • “lifetime annuity” where an employee became entitled to it before 6 April 2015 means an annuity :
    • payable by an insurance company of the employee’s choosing
    • paid at least once a year
    • payable for life, or the later of the employee’s death and the end of a guarantee period specified in the annuity contract which cannot exceed 10 years
    • that cannot allow the amount to go down unless is it varied in accordance with HMRC regulations
    • that cannot allow the payment of a capital sum on the employee’s death, except in certain circumstances
    • that is not capable of assignment or surrender, except in certain circumstances.

Where an employee becomes entitled to it on or after 6 April 2015, “lifetime annuity” means an annuity payable to the employee:

  • by an insurance company
  • for life, or the later of the employee’s death and the end of a guarantee period specified in the annuity contract (paragraph 3 of Schedule 28; PTM062400)

“drawdown pension” (paragraph 4 of Schedule 28; PTM062710) means:

  • a short-term annuity (paragraphs 4(a) and 6 of Schedule 28; PTM062620 and PTM062720) or
  • income withdrawal (paragraph 4(b) and 7 of Schedule 28; PTM062730 onwards)

"”short-term annuity” where the employee became entitled to it before 6 April 2015 means an annuity:

  • bought from an insurance company of the employee’s choosing
  • bought only from funds held in the employee’s drawdown pension fund
  • which is payable for a period not exceeding five years
  • whose amount cannot go down unless it is varied in accordance with HMRC regulations.

Where an employee becomes entitled to it on or after 6 April 2015, “short-term annuity” means an annuity: bought from an insurance company

  • bought only from funds held in the employee’s drawdown pension fund
  • which is payable for a period not exceeding five years.

“income withdrawal” means an amount (other than an annuity) which the employee is entitled to be paid from their drawdown pension fund or flexi-access drawdown fund.