RPSM10104490 - Technical Pages: Death benefits: Pensions: Dependants’ unsecured pension: A dependants’ short-term annuity contract

This guidance only covers individuals who became entitled to dependants’ unsecured pension before 6 April 2011. If the member who died reached age 75 between 22 June 2010 and 5 April 2011 you should also read the guidance in RPSM17100000 onwards.

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

Provision of a dependants’ short-term annuity contract

A dependants’ short-term annuity contract

• must be purchased from that dependants’ unsecured pension fund with an insurance company, which the dependant must have had the opportunity to choose,
• must be payable for a term which does not exceed five years and which ends before the dependant reaches the age of 75,
• must be paid at least once a year, whether in advance or in arrears,
• must not provide for the direct or indirect payment of capital payments triggered by the death of the annuitant, nor pay a dependants’ unsecured pension after the death of the dependant, and
• must only provide an income to the dependant that either

• • cannot decrease, or
  • reduces only in a manner prescribed by HMRC regulations (as with a dependants’ annuity contract, as described in RPSM09101730 to RPSM09101750) but reading any reference to member as reading dependant and lifetime annuity as short-term annuity except where specifically mentioned in the text.

The dependants’ unsecured pension paid from a dependants’ short-term annuity contract must not result in the maximum dependants’ unsecured pension payments permitted under the arrangement the contract was purchased from being exceeded.

When a dependants’ short-term annuity contract is purchased the scheme administrator must consider the level of dependants’ unsecured pension already provided for that dependant under the relevant arrangement in the pension year, whether paid direct as income withdrawal or through other dependants’ short-term annuity contracts previously purchased from that fund. The scheme administrator also needs to consider any income which will be provided under those existing dependants’ short-term annuity contracts later in that pension year. The scheme administrator also has to consider the position for future pension years.

Where the scheme administrator is unsure of the value of the dependants’ unsecured pension that will accrue in the future under a dependants’ short-term annuity contract, they may, for example, decide to hold back payments until nearer the end of the pension year when the position is clear, then pay a ‘top-up’ income withdrawal payment towards the end of that pension year.

RPSM09102130 deals with the taxation position where the limit is exceeded in a pension year.

Term of the contract

If the term of a dependants’ short-term annuity contract includes the dates of one or more formal review points (and therefore contains parts of two or more reference periods) the revised maximum calculated at that point may not accommodate the existing level of annuity payments. Any dependants’ short-term annuity contracts in existence at the time of the review are bound by the revised maximum, and any excess paid over this revised limit is an unauthorised member payment.

Consequently scheme administrators may wish to consider the implications of the term of a short term annuity not being tied to a specific reference period or them agreeing to a request from the dependant for a new reference period to begin. The future level of dependants’ unsecured pension provided under existing contracts also needs to be considered before any of the remaining dependants’ unsecured pension fund is used to purchase a dependants’ annuity contract or applied to provide a dependants’ scheme pension. This is because the revised limit imposed following a review may not accommodate that existing annuity income.

A dependant is in receipt of a short-term annuity which will not end until after 5 April 2011. How do the new rules affect them?

They have no immediate impact on the dependant. Their short-term annuity will continue unchanged for its remaining term.