RPSM10104440 - Technical Pages: Death benefits: Pensions: Dependants’ unsecured pension: Before 6 April 2011 and transition to drawdown pension

This guidance only covers individuals who became entitled to dependants’ unsecured pension before 6 April 2011.

If an individual became entitled to their pension on or after 6 April 2011 then see the guidance on dependants’ drawdown pensions at RPSM10104850.

A dependants’ unsecured pension before 6 April 2011

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 a child of the member and is aged 23 or more, they may be provided with a dependants’ unsecured pension on the basis of physical or mental impairment (see the second bullet of paragraph 2 in RPSM10104040), or on the basis covered by transitional regulations (RPSM10104042). In any of these cases, the maximum withdrawal is calculated in a way that approximates to the annual level of 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 them an annuity for life. The limits calculation for children aged 23 or more is made using tables prepared for this purpose by GAD, which only refer to some of the member’s actual circumstances: namely age and sex (separate tables for each, starting from age 23 - Table 1 for men and Table 2 for women). RPSM10104470 explains how this maximum is calculated in more detail.

Where the dependant is a child of the member who does not satisfy the physical or mental impairment condition (see RPSM10104040), nor any of the other transitional exceptions touched on above, then their pension can only be paid up to age 23. To deal with this limitation, which is expected to apply in the case of the majority of children’s pensions, a separate GAD table is provided. The children’s table is aimed towards depleting the fund by the time the child reaches their 23^r d birthday. The GAD tables do not distinguish between dependants aged less than 23 on any basis other than age, so there are no alternatives depending on sex or health issues. Consequently the child table (Table 3) must be used to establish the statutory withdrawal limits in all such reviews carried out for any dependants (whether children of the member or not) while they are under the age of 23. The adult tables 1 & 2 pick up for reviews occurring in later ages.

In other words, children who qualify under the impairment rule above or under any of the other exceptions that permit their pension to continue beyond 23 must still use the child table (Table 3) for all statutory reviews occurring up to age 23. The same applies for other dependants who are not children of the member, but are not yet 23.

In this context it is important to note that the tax rules never require the maximum income to actually be drawn in pension. The statutory calculations merely serve to determine whether a given level of withdrawal is authorised for tax purposes. For advice purposes scheme administrators are free to provide more modest calculations suggesting recommended maximum withdrawals, to avoid the possibility of prematurely exhausting the unsecured pension fund, and ensuring the resulting payments do not exceed the statutory limits. Using the lowest figures on tables 1 and 2 might achieve that, however the outcome will not necessarily be tailored to the child’s actual circumstances - administrators may want to seek more specialist advice. For the purpose of checking the limits against the tax rules, HMRC will always rely on the statutory basis.

In the case of a child whose pension is continuing beyond their 23^r d birthday, the statutory switch of tables explained above (from the children’s table 3 to the men’s table 1 or women’s table 2, as appropriate) need not be applied until the next reference period review occurs, whenever that is due on or after their 23^r d birthday (the pattern of intervals for reference periods and reviews is explained in RPSM10104480).

Taxation of a dependants’ unsecured pension

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

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Changes from 6 April 2011

On 6 April 2011 the terms used to describe dependants’ unsecured pensions change:

• Dependants’ unsecured pension becomes dependants’ drawdown pension,
• A dependants’ unsecured pension fund becomes a dependants’ drawdown pension fund, and
• A dependants’ unsecured pension year becomes a dependants’ drawdown pension year.

The maximum amount of dependants’ drawdown pension that may be paid in a pension year is 100 per cent of the basis amount. The maximum dependants’ drawdown pension must be reviewed every three years whilst the member is under 75. When the member is 75 or older this maximum dependants’ drawdown pension must be reviewed every year.

The new pension terms will apply from 6 April 2011. But when the new maximum pension rules will apply depend on individual circumstances - see RPSM10104480.