Lifetime annuities

​

Annuities were brought into line with drawdown pensions from 6 April 2015; the restriction that income can only be paid to a ‘dependant’ has been removed. This means that joint-life annuities can be set up to be passed onto any nominated individual when they die. However, on death of the beneficiary the annuity will cease. This is unlike drawdown pensions where it is possible to continue passing on the fund until it eventually runs out.

The tax treatment of benefits has also been brought in to line, if death happened before age 75 the income is paid tax free.  For deaths age 75 and over the income is liable for tax at the recipient’s marginal rate of tax.

Since 6 April 2015:

​

• joint-life annuities can be paid out to any beneficiary

• guaranteed term annuities can be paid out to any beneficiary

• where an individual dies under age 75 with a joint life or guaranteed term annuity, any payments to beneficiaries will be tax-free

• if an individual dies under the age of 75 with either uncrystallised rights or unused funds remaining in a drawdown pension, any beneficiaries annuity purchased with the funds can be made tax-free

• tax will continue at the dependant's marginal rate on annuities already in payment at 6 April 2015.

​

Scheme pensions

​

The above does not apply to scheme pensions. This means that the payment of a dependants’ pension paid from a defined benefit scheme will continue to be taxed at the dependant’s marginal rate, regardless of the age of the individual when they died.

​

Some other changes to annuity rules…

​

Annuities continue to be subject to the requirement to be paid at least annually and for the lifetime of the annuitant. However, the following has changed:

• The 10 year cap on guaranteed periods has been removed. Annuity payments can be guaranteed for any period if this is agreed when the annuity is bought.

• The annuity income can be varied, up and down, if it is agreed when the annuity is bought.

​

Dependants no more…

​

The restriction that income can only be paid to a ‘dependant’ no longer applies. Where someone has been nominated as beneficiary by the plan holder they can receive pension benefits.  This means that any named beneficiary can elect to take an income (including in the form of drawdown) as well as a lump sum. One advantage of a beneficiary taking drawdown is that on their death any remaining funds may be passed on to further nominated beneficiaries. This makes it possible to continue passing on the fund until it eventually runs out.

​

Lifetime allowance

​

The lifetime allowance still applies. If an individual’s pension has not already been tested against the lifetime allowance when that individual dies, it will be tested before being passed on. However, any pension funds that a person inherits will not count towards their own lifetime allowance.

There is a quirk regarding the lifetime allowance test on uncrystallised funds. If the member was aged under 75 when they died, and the uncrystallised funds lump sum death benefit is paid more than 2 years from the date the scheme administrator first knew of the member’s death (or if earlier, the date they could first reasonably have been expected to know of it), the uncrystallised funds lump sum death benefit is not tested against the lifetime allowance. 

​

PTM073200 - Death benefits: lump sums: uncrystallised funds lump sum death benefit

​

Two year rule

​

The rule that tax-free lump sum payments (where the individual dies under 75) must be made within two years of the scheme administrator being notified of the death of the individual remains. However, any lump sum payments made after the two year period will no longer be an unauthorised payment, i.e. chargeable at 55%. Instead, they will be taxed at the recipient's marginal rate.

Payments from a joint-life annuity, or an annuity purchased from uncrystallised rights or unused funds remaining in a drawdown pension, must be made within two years of the scheme administrator being notified of the death of the individual, or they become taxable at marginal rate.

​

Discretion or direction?

​

When a pension scheme member dies, the scheme administrator has to pay the death benefits to someone. The process of choosing who the beneficiary(ies) can either involve the scheme administrator using their discretion, or the member directing the choice before their death. The way the choice is made can affect the inheritance tax (IHT) payable on the benefits.