PTM072430 - Death benefits: types of pension: beneficiary's flexi-access drawdown from 6 April 2015: where a beneficiary had not designated funds in an arrangement into a drawdown pension fund before 6 April 2015
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Glossary |
Establishing a beneficiary’s flexi-access drawdown fund
Beneficiary’s flexi-access drawdown benefits
Taxation of a beneficiary’s flexi-access drawdown pension
Establishing a beneficiary’s flexi-access drawdown fund
Paragraphs 21-22A, 27B-27E and 27G-27K Schedule 28 Finance Act 2004
Beneficiary’s drawdown pension is the collective name given to drawdown pension payable to either a dependant, nominee or successor.
A beneficiary wishing to take their pension benefits as beneficiary’s drawdown pension must designate sums and assets in a money purchase arrangement as being available for drawdown pension. The sums or assets designated for beneficiary’s flexi-access drawdown are called ‘newly-designated funds’.
A beneficiary’s flexi-access drawdown fund can be created only on or after 6 April 2015. However, a beneficiary’s flexi-access drawdown fund can be created following the death of an individual who died before 6 April 2015.
Dependant’s flexi-access drawdown fund
Paragraph 22A Schedule 28 Finance Act 2004
A dependant’s flexi-access drawdown fund is created by a dependant designating funds into drawdown on or after 6 April 2015 following the death of a member.
Any designation made by the dependant before 6 April 2015 would have created a dependants’ drawdown pension fund.
An arrangement can only hold one drawdown fund. So, if a dependant designates funds held under the same arrangement in more than one tranche, the later designated funds will go into the drawdown fund created by the earlier designation.
This means that if:
- the dependant has already designated funds into drawdown under the arrangement before 6 April 2015, and
- they make a further designation under the same arrangement on or after 6 April 2015
those later designated funds will go into the existing drawdown fund under the arrangement. If, when that later designation is made, the pre 6 April 2015 fund has not converted to flexi-access drawdown (see PTM072440 and PTM072450), the funds will be held under a dependants’ drawdown pension fund and not a dependant’s flexi-access drawdown fund. Even though funds were designated after 5 April 2015 they must be used to provide capped dependants’ drawdown pension in accordance with PTM072320.
Nominee’s flexi-access drawdown fund
Paragraph 27E Schedule 28 Finance Act 2004
A nominee’s flexi-access drawdown fund is created when a nominee designates funds to provide drawdown pension following a member’s death. The designated sums and assets must be either unused uncrystallised funds or unused drawdown funds.
"Unused uncrystallised funds' are funds which:
- immediately before the member's death were held in the member's drawdown pension fund or flexi-access drawdown fund, and
- were not used to provide benefits to the member in their lifetime, and
- since the member's death have not been used to provide an authorised death benefit (see PTM071000).
'Unused drawdown funds' are funds which:
- immediately before the member’s death were held in the member's drawdown pension fund or flexi-access drawdown fund, and
- since the member’s death have not been used to provide an authorised pension death benefit (see PTM071000).
Successor’s flexi-access drawdown fund
Paragraph 27K Schedule 28 Finance Act 2004
A successor’s flexi-access drawdown fund is created when a successor designates funds to provide drawdown pension following the death of a dependant, nominee or a previous successor (the beneficiary). The sums and assets designated must be unused drawdown funds. That is funds which:
- immediately before the death of the relevant beneficiary were held under the beneficiary’s flexi-access drawdown fund or (if the beneficiary was a dependant) dependants’ drawdown pension fund, and
- since the beneficiary’s death have not been used to provide an authorised pension death benefit (see PTM071000).
Beneficiary’s flexi-access drawdown benefits
A beneficiary can take benefits from their flexi-access drawdown fund as drawdown pension in the form of either a short-term annuity (see PTM072420) or income withdrawal.
If the beneficiary chooses income withdrawal from their flexi-access drawdown fund, they can take as much or as little from it as they like each year.
Alternatively, subject to the rules of the scheme, a beneficiary can, at any time, use part or all of their flexi-access drawdown fund to secure a pension by purchase of a beneficiary's annuity - see PTM072200. If the beneficiary is a dependant they can also use some or all of their flexi-access drawdown fund to provide a dependants’ scheme pension (see PTM072100).
Taxation of a beneficiary’s flexi-access drawdown pension
This page of guidance relates only to drawdown pension paid under a beneficiary's flexi-access drawdown fund created on or after 6 April 2015. It does not cover the tax treatment of a drawdown pension paid under a flexi-access drawdown fund created following the conversion of a dependants’ drawdown pension fund.
The tax treatment of beneficiary’s drawdown pension paid on or after 6 April 2015 depends on:
- when the relevant person died, and
- whether the drawdown pension is paid as income withdrawal or short-term annuity.
Taxation of beneficiary's income withdrawal
Sections 579A and 579CZA(1), (2) and (6) Income Tax (Earnings and Pensions) Act 2003
Dependants’ or nominees’ income withdrawal is taxable if it is paid in respect of a member who was aged 75 or older when they died.
Dependants’ or nominees’ income withdrawal is also taxable if:
- it is paid from a flexi-access drawdown fund that includes designated ‘unused uncrystallised funds’ (see above), and
- those unused uncrystallised funds were not designated within two years of the earlier of the day the scheme administrator first knew of the member’s death, or the day they could first reasonably have been expected to know of it. The legislation refers to this period as the ‘relevant two-year period’.
Dependants’ or nominees’ income withdrawal is not taxable if:
- it is paid in respect of a member who had not reached age 75 when they died, and
- if the designated funds include ‘unused uncrystallised funds’, the dependant or nominee had designated those funds within the ’relevant two-year period’.
Successors’ income withdrawal is taxable if it is paid in respect of a beneficiary who was aged 75 or older when they died.
Successors’ income withdrawal is not taxable if it is paid in respect of a beneficiary who had not reached age 75 when they died.
For guidance on the tax treatment of income withdrawal paid from a dependant’s flexi -access drawdown fund that was created following conversion of a:
- capped dependants’ drawdown pension fund – go to PTM072450,
- flexible dependants’ drawdown pension fund – go to PTM072440.
Taxation of beneficiary’s short-term annuity
Sections 579A and 646C(1), (2) and (6) Income Tax (Earnings and Pensions) Act 2003
Dependants’ or nominees’ short-term annuity is taxable if it is paid in respect of a member who:
- was aged 75 or older when they died, or
- died before 3 December 2014 at any age.
Dependants’ or nominees’ short-term annuity purchased from a beneficiary’s flexi-access drawdown fund will also be taxable if:
- any of the funds designated to create that flexi-access drawdown fund included the member’s ‘unused uncrystallised funds’ (see above), and
- those unused uncrystallised funds were not designated within two years of the earlier of the day the scheme administrator first knew of the member’s death, or the day they could first reasonably have been expected to know of it (the ‘relevant two-year period’).
Dependants’ or nominees’ short-term annuity is not taxable if:
- it is paid in respect of a member who died on or after 3 December 2014 aged under 75, and
- if the flexi-access drawdown fund from which the annuity was purchased included designated ‘unused uncrystallised funds’, the dependant or nominee had designated those funds within the ’relevant two-year period’.
Successors’ short-term annuity is taxable if it is paid in respect of a beneficiary who:
- was aged 75 or older when they died, or
- died before 3 December 2014 at any age.
Successors’ short-term annuity is tax free if it is paid in respect of a beneficiary who died on or after 3 December 2014 aged under 75.
Go to PTM072420 for guidance on the tax treatment of dependants’ short-term annuity purchased from a dependant’s flexi -access drawdown fund that was created following conversion of a dependants’ drawdown pension fund.
Where a beneficiary’s drawdown pension is taxable, it is taxed at their marginal rate in the tax year in which the drawdown pension accrues. The person who pays the pension is required to deduct income tax from the income withdrawal under the PAYE regulations.