RPSM10104440 - Technical Pages: Death benefits: Pensions: Dependants’ unsecured pension

A dependants’ unsecured pension

A dependants’ unsecured pension may be paid either

• direct from the arrangement as income withdrawals, or
• through the purchase of a dependants’ short-term annuity contract from an insurance company - see RPSM10104490.

There is no objection to a dependants’ unsecured pension being provided by a combination of income withdrawal payments and short-term annuity contracts, or by a series of short-term annuity contracts running concurrently.

The dependants’ unsecured pension fund

The funds used within an arrangement to generate dependants’ unsecured pension are referred to in the legislation as the dependants’ unsecured pension fund (see RPSM10104430). These funds are used to pay the pension as and when the dependant requires, within given limits. Once funds have been effectively designated into a dependant’s unsecured pension fund, it is not possible to reverse the designation; for example, it is not possible to reverse the original decision or exercise a ‘change of mind’ and opt instead for an unsecured pension fund lump sum death benefit.

Level of dependants’ unsecured pension payable

There is a maximum limit on the total of all dependants’ unsecured pensions derived from the arrangement in question (whether paid through income withdrawals, short-term annuity contracts or a combination of both).

Where the dependant is

• not a child dependant (see below), or
• is a child of the member but is being provided with a dependants’ unsecured pension on the basis of physical or mental impairment (see the second bullet of paragraph 2 in RPSM10104040),

the maximum limit is calculated in such a way as to mirror the level of annual annuity income the dependant could generate at the point of calculation if the funds being used to generate that dependants’ unsecured pension were instead used to buy that dependant an annuity for life. This calculation is made using tables prepared for this purpose by GAD. RPSM10104470 explains how this maximum is calculated in more detail.

The GAD tables do not distinguish between dependants under age 23 on grounds of sex, health or capacity. The child table (Table 3) must be used for all child dependants aged under 23. However, it should be noted that the income withdrawal limits calculated by reference to the tables set the maximum permissible income limits and scheme administrators are free to make more modest withdrawal recommendations to avoid the possibility of prematurely exhausting the unsecured pension fund in the case of a child who is dependant on grounds of incapacity and might be expected to draw pension beyond the age of 23.

Where the dependant is a child dependant who does not satisfy the physical or mental impairment condition (see RPSM10104040) then that pension cannot be paid beyond age 23.

Taxation of a dependants’ unsecured pension

A dependants’ unsecured pension is taxable as pension income on the recipient through PAYE (see RPSM04101020).