PTM072330 - Death benefits: types of pension: dependants’ drawdown pension: dependants’ flexible drawdown pension (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 PTM000001
Dependants’ flexible drawdown
Difference between flexible drawdown and capped drawdown
Qualifying to take a dependants’ pension as flexible drawdown
Making pension contributions and flexible drawdown
Minimum income requirement
Declaration
Note - a dependant’s flexible drawdown fund in existence immediately before 6 April 2015 is from that date automatically treated as a flexi-access drawdown fund, which have different rules.
See pagePTM072400for guidance on dependants’ flexi-access drawdown funds.
Dependants’ flexible drawdown
Section 167 pension benefit rule 4 Finance Act 2004
Paragraph 24(11) schedule 28 Finance Act 2004
Flexible drawdown is a form of ‘income withdrawal’ where the dependant’s pension is paid direct from their pension scheme. There is no limit on the amount that the pension scheme can pay them in any year. They can take as much or as little as they like, including taking out all the funds as one payment. They can also use the flexible drawdown pension fund to buy a dependant’s annuity, dependant’s short term annuity or provide a dependant’s scheme pension.
A dependant can continue flexible drawdown of their dependant’s pension when they are 75 or older as there is no limit on the amount they can take from the scheme.
All payments of flexible drawdown are taxed under PAYE.
A scheme does not have to offer flexible drawdown.
There is another type of ‘income withdrawal’ drawdown pension called capped drawdown.
Difference between flexible drawdown and capped drawdown
Paragraph 24(11) schedule 28 Finance Act 2004
Both flexible drawdown and capped drawdown are a form of ‘income withdrawal’. Both types of drawdown pension are taxed as pension income.
With flexible drawdown, there is no limit on the amount of drawdown pension the dependant can take each year. There is also no need for the pension fund to be reviewed to work out the maximum possible pension. However, not everyone can take flexible drawdown. In particular, the dependant must be getting a minimum amount of secure pension income every year to qualify for flexible drawdown - see Minimum income requirement below.
With capped drawdown, there is a limit on the amount of pension the dependant can take from the scheme each year. Under the tax rules anyone who has benefits in a money purchase arrangement can use capped drawdown. However not all schemes offer this option.
See PTM072320 for more about dependants’ capped drawdown.
Qualifying to take a dependants’ pension as flexible drawdown
Section 167(2A) Finance Act 2004
Paragraph 24C schedule 28 Finance Act 2004
The Registered Pension Schemes (Relevant Income) Regulations 2011 - SI 2011/1783
A scheme can pay a dependant’s benefits as flexible drawdown if the dependant meets the following conditions:
- they must have pensions in payment from other sources of at least a certain amount (called the minimum income requirement) payable in the tax year in which they make their flexible drawdown declaration, and
- for declarations made before 27 March 2014, the required minimum amount of other pension income was £20,000. For declarations made on or after 27 March 2014 the required minimum amount of other pension income is £12,000.
Example
A person starts receiving a pension on 1 December 2011. The annual pension is £36,000 payable in arrear in equal monthly instalments so £12,000 pension is received in tax year 2011 to 2012. This pension alone will not meet the minimum income requirement for that year. However, the following year because the full rate of £36,000 is due to be paid in the relevant tax year, the condition is met:
- they must have received at least one payment from each pension in payment for it to be included in meeting the minimum income requirement
- they cannot be building up benefits under any defined benefits or cash balance arrangements held under a registered pension scheme when they make their declaration - if their benefits continue to be linked to their current salary they are still classed as an active member, even though no additional service may be accruing
- they cannot have made any contributions to an other money purchase arrangement held under a registered pension scheme in the tax year that they go into flexible drawdown, also no one else should have made contributions to that dependant’s other money purchase arrangements in that tax year, and
- they must give the scheme administrator a declaration, which the scheme administrator must accept, that contains information set by HMRC.
Anyone who meets these conditions can take their dependants’ drawdown pension using flexible drawdown. They do not need to be an adult.
Find out what pensions count towards the minimum income requirement below under Minimum income requirement.
Making pension contributions and flexible drawdown
Section 167(2B) Finance Act 2004
To qualify for dependants’ flexible drawdown, an individual:
- must stop building up benefits under any registered pension scheme in which they have defined benefits or cash balance benefits (that means they must have ceased to be an active member, at the time they make the declaration), and
- cannot make any contributions to an other money purchase arrangement under any registered pension scheme in the tax year they go into dependants’ flexible drawdown. Neither can their employer, or anyone else pay contributions to that dependant’s other money purchase arrangement during the tax year.
An individual cannot make a dependant’s flexible drawdown declaration until the tax year in which no contributions have been made.
Where the individual starts to contribute or resume active membership in future tax years, the contributions are tax-relievable subject to the normal rules for relievable contributions, but the individual is liable to the annual allowance charge on the whole of their contributions and any employer contributions and any contributions made by anyone else on their behalf. Payment of any contracted-out payments from HMRC does not count as contributions for these purposes.
Where the individual starts building up benefits again (becomes an active member) under a defined benefits, collective money purchase or cash balance arrangement, they are also liable to the annual allowance charge.
Minimum income requirement
Paragraph 24C(3) schedule 28 Finance Act 2004
Regulation 3 The Registered Pension Schemes (Relevant Income) Regulations 2011 - SI 2011/1783
Regulation 9 Pension Protection Fund (Tax) Regulations 2006 - Statutory Instrument - SI 2006/575
The minimum amount of other pension income an individual must be receiving in order to be eligible for dependants’ flexible drawdown under the tax rules is:
- for flexible drawdown declarations made before 27 March 2014, £20,000, or
- for flexible drawdown declarations made on or after 27 March 2014, £12,000.
Only pensions actually in payment count towards the minimum income requirement for flexible drawdown. To qualify, the pension must be guaranteed for life and, in general, not be one that can reduce from one year to the next.
Any relevant income that is payable in a currency other than Sterling is to be converted to its Sterling equivalent using the exchange rate for the relevant day, that is, the declaration date for the first declaration.
The following broad types of pension may be counted towards the minimum income requirement:
- State Pension
- scheme pensions
- dependants’ scheme pensions
- lifetime annuities
- dependants’ annuities.
The full details of what pensions count towards the minimum income requirement are as follows:
- a scheme pension or dependants’ scheme pension, where paid as an annuity
- where a scheme pension or dependants’ scheme pension is paid from a registered pension scheme and the pension is provided from an annuity policy, the pension counts towards the minimum income requirement even if the pension scheme has fewer than 20 people getting a pension
- a scheme pension or dependants’ scheme pension which is not paid as an annuity, but is paid from a registered pension scheme that has 20 or more people receiving a pension - guidance on what a scheme pension is can be found at PTM062300 - any pension paid from a defined benefits part of a registered pension scheme is a scheme pension
- pension paid as a lifetime annuity or dependants’ annuity where the annuity either will pay the same amount each year or the amount can increase
- pension paid as a lifetime annuity or dependants’ annuity where the amount received each year varies, and can go down can be counted towards the minimum income requirement; but unless the annual amount of the annuity is calculated only by reference to the RPI in accordance with regulation 2(2)(a)(i) SI 2006/568 the amount that is included is the minimum amount payable each year under the contract in accordance with regulation 2(4) SI 2006/568 - guidance on what a lifetime annuity is can be found at PTM062400
- pensions from an overseas pension scheme that would be one of the types of pensions listed above if paid from a registered pension scheme (see PTM112200)
- periodic compensation paid by the Pension Protection Fund
- State Pension
- other social security pensions that are either taxable under section 577 ITEPA 2003 or are payable under the law of another country outside the UK and are very similar in character to the state pension and other benefits taxable under section 577 ITEPA 2003
- certain payments made by the financial assistance scheme (FAS) or because your pension scheme is to enter FAS.
The following do not count towards the minimum income requirement:
- drawdown pensions and dependants’ drawdown pensions (previously called either unsecured pension or alternatively secured pension)
- short-term annuities and dependants’ short-term annuities
- scheme pensions paid from a registered pension scheme in respect of defined benefits arrangements or collective money purchase arrangements where the scheme has fewer than 20 members
- if the terms of a lifetime annuity contract or dependants’ annuity contract allow the annual amount of the annuity payment to go down, any amount over the minimum amount payable each year under the contract cannot be counted, unless the annual amount of the annuity is calculated only by reference to the RPI in accordance with regulation 2(2)(a)(i) SI 2006/568
- a pension from an overseas pension scheme that would be one of the types listed above if paid from a registered pension scheme (see PTM112200).
Declaration
Section 167 Finance Act 2004
Regulations 2 and 3 The Registered Pensions Schemes (Prescribed Requirements of Flexible Drawdown Declaration) Regulations 2011 - SI 2011/1792
To qualify for flexible drawdown, the dependant must give a declaration to their scheme administrator. This declaration must be signed and dated and contain the following information
- their full name and address and National Insurance number (See PTM160400)
- certain details of each pension source that allows them to meet the minimum income requirement (see above), that is:
- the name and address of the pension payer, and
- the total amount of pension income payable in the tax year in which the dependants’ drawdown declaration is made
- a statement from the dependant that confirms that the flexible drawdown conditions are met and that the contents of the declaration are correct and complete to the best of their knowledge or belief, and that if they have previously made a flexible drawdown declaration this declaration was accepted by the relevant scheme administrator.
The declaration must be signed by the dependant who is to receive the flexible drawdown pension (or by, for example, an attorney appointed under a power of attorney or, in the case of a child, their parent or guardian).
If this declaration isn’t completed and provided to the scheme administrator, the dependant does not qualify for flexible drawdown and any drawdown pension will be capped drawdown.
A declaration can cover more than one arrangement provided all the conditions are met for flexible drawdown and the declaration is valid and accepted by the scheme administrator of the scheme in which the arrangement is held.
A multiple arrangement declaration will not cover:
- arrangements where no designation has occurred at the time the declaration is made
- arrangements set up after the declaration is made (whether or not this is to receive a transfer)
- arrangements in a different registered pension scheme with the same scheme administrator
- later fund designations in an arrangement where the dependant only designated part of the funds at the time of the declaration.
If a flexible drawdown declaration turns out to be invalid, for example due to it containing incorrect information or not being signed, then any pension actually drawn will have to meet the requirements for capped drawdown. This means that any amount paid in excess of the capped drawdown limit will not be drawdown pension and may be an unauthorised payment and subject to the unauthorised payment charge, surcharge and scheme sanction charge (see PTM134000 and PTM135000).
The scheme administrator must keep a copy of the declaration (see PTM160200).
See PTM160800 for details of penalties where incorrect information has been provided.