PTM072450 - Death benefits: types of pension: beneficiary's flexi-access drawdown from 6 April 2015: where a dependant had designated funds in an arrangement into a dependant’s capped drawdown pension fund before 6 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 |
Continuing in dependants’ capped drawdown
Conversion of a dependants’ capped drawdown pension fund into a dependants’ flexi-access drawdown fund
Payment of excessive dependant’s drawdown pension
The scheme administrator agreeing to a request for conversion
Conversion to dependants’ flexi-access drawdown following a transfer of the funds held in a dependants’ drawdown pension fund
Taxation
Continuing in dependants’ capped drawdown
A dependant who was in dependant’s capped drawdown on 5 April 2015 may choose to:
- continue in dependant’s capped drawdown, or
- convert to dependant’s flexi-access drawdown.
Unless the dependant takes action to convert to flexi-access drawdown, they will remain in dependants’ capped drawdown.
The dependant’s drawdown pension fund rules will continue to apply to the dependant’s drawdown pension fund. Briefly, this means that the existing dependant’s drawdown pension fund continues to be used to provide dependant’s capped drawdown pension. Any further funds designated after 6 April 2015 in the arrangement will be designated to the dependant’s existing dependant’s capped drawdown pension fund. The limit on the maximum amount of pension the dependant can draw each year will continue to apply as will all the other dependant’s capped drawdown pension rules. For details on the dependant’s capped drawdown pension rules see PTM072320.
Conversion of a dependants’ capped drawdown pension fund into a dependants’ flexi-access drawdown fund
Paragraphs 22B to 22D Schedule 28 Finance Act 2004
Certain events occurring on or after 6 April 2015 will cause a dependants' capped drawdown pension fund being to be converted into a dependant’s flexi-access drawdown fund. These events are:
- the payment of excessive dependant’s drawdown pension
- the scheme administrator agreeing to a request for conversion
- certain transfers.
If on 5 April 2015 a dependant was receiving dependants’ flexible drawdown pension, their pension converted to dependant’s flexi-access drawdown on 6 April 2015 – see PTM072440.
Payment of excessive dependant’s drawdown pension
Paragraph 22B Schedule 28 Finance Act 2004
With dependant’s capped drawdown pension there is an annual limit on the total amount of:
- dependant’s income withdrawal, and
- dependant’s short-term annuity
that may be paid from a dependant’s capped drawdown pension fund (see PTM072320).
A dependant will convert from capped drawdown to flexi-access drawdown if on or after 6 April 2015 their capped drawdown pension fund makes a payment that breaches that limit. The legislation treats the conversion as happening immediately before the payment is made. The dependants’ drawdown pension fund is converted into a dependant’s flexi-access drawdown fund. The payment is treated as having been made from a dependant’s flexi-access drawdown pension fund and is therefore an authorised payment.
Because the payment of dependant’s capped drawdown pension has become a payment of dependant’s flexi-access drawdown pension, it is no longer excessive (as there is no limit on the amount that can be paid as dependant’s flexi-access drawdown pension).
The scheme administrator agreeing to a request for conversion
Paragraph 22C Schedule 28 Finance Act 2004
A dependant can ask the scheme administrator to convert their dependant’s capped drawdown pension fund into a flexi-access drawdown fund in respect of the arrangement holding the fund. The dependant does this by giving a notification requesting the conversion to the scheme administrator. There is not set format for this notification. The notification may be given at any time from 17 December 2014.
The scheme administrator does not have to accept the notification. If they do not then the dependant will continue in dependants’ capped drawdown (see PTM072320 ) until another event leading to conversion to dependant's flexi-access drawdown occurs.
If the scheme administrator accepts the notification, the dependant’s capped drawdown fund becomes a dependant's flexi-access drawdown fund from the later of:
- the date the scheme administrator accepts the notification
- the start of 6 April 2015.
The dependants’ flexi-access drawdown rules will then apply.
Conversion to dependants’ flexi-access drawdown following a transfer of the funds held in a dependants’ drawdown pension fund
Paragraph 22D Schedule 28 Finance Act 2004
From 6 April 2015 if a dependant makes a recognised transfer that include their capped drawdown pension fund they have two options of providing dependants’ drawdown pension under the new scheme. These are:
- continue to receive dependants’ capped drawdown pension under the receiving scheme, or
- convert to dependants’ flexi-access drawdown pension as part of the transfer process.
The dependant converts to flexi-access by notifying the scheme administrator of the receiving scheme. They tell the scheme administrator that they want the transferred funds to be ‘newly-designated dependant funds’.
The dependant can give this notification before, or at the time, they designate the funds in the receiving scheme as available to pay dependants’ drawdown pension.
The scheme administrator cannot refuse to accept the notification.
The transferred funds become newly-designated dependant funds’ under a dependant’s flexi-access drawdown fund on the latest of:
- 6 April 2015,
- the date the designation is made,
- the date of the transfer.
See PTM104000 for more details about transfers of dependant’s drawdown pension.
Taxation
Sections 579A and 579CZA(1)and(5) Income Tax (Earnings and Pensions) Act 2003
This page of guidance relates only to drawdown pension paid under:
- a dependants’ drawdown pension fund, or
- a dependants’ flexi-access drawdown funds that is a converted dependants’ drawdown pension fund.
It does not cover the tax treatment of a drawdown pension paid under a newly created flexi-access drawdown funds (see PTM072430).
Dependants’ drawdown pension may be paid as dependants’ income withdrawal or dependant’s short-term annuity.
Before 6 April 2015 payments of dependants’ drawdown pension were taxable as pension income of the recipient. This applied whether the dependants’ drawdown pension was paid as dependants’ income withdrawal or dependants’ short-term annuity.
From 6 April 2015 dependants’ drawdown pension may be taxable, or it may be paid tax free. The rules relating to tax treatment also depend on whether the dependants’ drawdown pension is paid as:
- dependants’ income withdrawal, or
- dependants’ short-term annuity.
If the payment is taxable, it is taxable as pension income of the dependant. The payer of the pension is required to deduct income tax from the payments, under the PAYE regulations.
Member aged 75 or older when they died
Sections 579A, 579CZA(1), 579D and 646C(1) Income Tax (Earnings and Pensions) Act 2003
Dependants’ drawdown pension is taxable as the dependant’s pension income if it is paid in respect of a member aged 75 or older when they died. This applies to payments of both dependants’ income withdrawal and dependants’ short-term annuity.
Member aged under 75 on death: dependants’ income withdrawal
Sections 579A and 579CZA(4) and (5) Income Tax (Earnings and Pensions) Act 2003
Payment from capped drawdown pension fund
Drawdown pension paid as dependants’ income withdrawal will be taxable where it is paid from a capped dependants’ drawdown pension fund if either:
- dependants’ income withdrawal, or
- dependants’ short-term annuity
was paid from or in respect of that fund before 6 April 2015.
Drawdown pension paid as dependants’ income withdrawal from a capped dependants’ drawdown pension fund will be tax free if no payments of dependants’ income withdrawal or short-term annuity were made by or in respect of that fund before 6 April 2015.
Payment from flexi-access drawdown fund
Drawdown pension paid as dependants’ income withdrawal will be taxable where it is paid from a dependant’s flexi-access drawdown fund if:
- any of the sums and assets in that fund derive from a dependant’s drawdown pension fund created before 6 April 2015, and
- before 6 April 2015 either dependants’ income withdrawal or dependants’ short-term annuity was paid from, or in respect of, that dependant’s drawdown pension fund.
Drawdown pension paid as dependants’ income withdrawal from a dependant’s flexi-access drawdown fund, where some or all of the funds derive from a dependant’s drawdown pension fund will not be taxable if no payments of dependants’ income withdrawal or short-term annuity were made by or in respect of that dependant’s drawdown pension fund before 6 April 2015.
Member aged under 75 on death: dependants’ short-term annuity
Sections 579A and 646C(1), (4) and (5) Income Tax (Earnings and Pensions) Act 2003
Drawdown pension paid as dependants’ short-term annuity will be taxable if it is paid in respect of a member who died before 3 December 2014.
PTM072420 provides detailed guidance on when a dependants’ short-term annuity is, or is not taxable.