PTM062620 - Member benefits: pensions: drawdown pension rules immediately before 6 April 2015: short-term annuities (up to 5 April 2015)
As of 6 April 2024 there is no longer lifetime allowance. If you are looking for information about protections, enhancement factors and the lifetime allowance charge please see these pages on The National Archives.
If you are looking for information about the principles of lifetime allowance and benefit crystallisation events please see these pages of The National Archives.
Glossary |
The difference between short-term annuities and income withdrawal from capped/flexible drawdown (up to 5 April 2015)
Short-term annuity and income withdrawal (from either capped drawdown or flexible drawdown) taken at the same time from the same pension scheme/arrangement (up to 5 April 2015)
Amount that can be paid from a short-term annuity (up to 5 April 2015)
Reviewing capped drawdown when a short-term annuity is being paid (position at 5 April 2015)
Short-term annuities and death (up to 5 April 2015)
Note: The guidance on this page relates to short-term annuities taken out before 6 April 2015. See PTM062720 for guidance on short-term annuities taken out on or after 6 April 2015.
The difference between short-term annuities and income withdrawal from capped/flexible drawdown (up to 5 April 2015)
Part of a drawdown pension fund can be used to buy a short-term annuity contract from an insurance company of the member’s choice. A short-term annuity contract will pay the member a fixed amount each year. The contract can last for up to five years. It does not have to come to an end when the member reaches age 75.
With a short-term annuity contract, the member’s annuity is paid by the insurance company rather than, as for income withdrawal from capped and flexible drawdown, directly from their drawdown pension fund. The amount they get each year will be a pre-set amount. This could for example be a set amount of money or the amount paid could be dependent on the performance of an investment index. Unlike income withdrawal from either capped or flexible drawdown, the member cannot choose to change the amount they get each year.
Short-term annuity and income withdrawal (from either capped drawdown or flexible drawdown) taken at the same time from the same pension scheme/arrangement (up to 5 April 2015)
As long as the scheme rules allow it, the member can use a short-term annuity alongside income withdrawal from either or both capped and/or flexible drawdown pensions.
Amount that can be paid from a short-term annuity (up to 5 April 2015)
There is no minimum amount.
If a short-term annuity is purchased from a drawdown pension fund to which flexible drawdown applies, there is no upper limit on the amount the short-term annuity can pay.
Where a short-term annuity is bought using funds from a capped drawdown pension fund, there is an upper limit on the amount the short-term annuity can pay the member. The amount payable from a short-term annuity contract plus the amount of any income withdrawal from the capped drawdown pension fund in a pension year cannot be more than the maximum drawdown pension.
Example
Heather’s maximum drawdown pension is £5,000 per pension year. Heather has bought a short-term annuity using funds from her drawdown pension fund. The annuity pays Heather £3,000 a year in equal monthly amounts.
Heather wants to take some drawdown pension directly from her drawdown pension fund as income withdrawal. The £3,000 short-term annuity reduces the amount of income withdrawal Heather can be paid. The maximum income withdrawal on top of the short term annuity Heather can have each year is £2,000 (£5,000 - £3,000 = £2,000).
Reviewing capped drawdown when a short-term annuity is being paid (position at 5 April 2015)
A short-term annuity can be for a period of up to five years. However if the member is also taking 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 short-term annuity contract the member may buy, they need to remember that their maximum drawdown pension could change part way through the term of the annuity. If their maximum drawdown pension goes below the amount payable by their short-term annuity contract, the excess amount will be an unauthorised payment (see PTM131000)
Short-term annuities and death (up to 5 April 2015)
A short-term annuity may be guaranteed to make payments for a set period not exceeding five years, so that even if the member dies during this period the annuity contract will continue to make annuity payments until the end of the term of the contract.
Apart from such guaranteed annuity payments, a short-term annuity contract cannot provide a benefit after the member’s death.