RPSM11102050 - Technical Pages: Lifetime allowance: When you test for the lifetime allowance: What does “becoming entitled” to a drawdown (before 6 April 2011 an unsecured) pension, scheme pension, lifetime annuity or (before 6 April 2011) an alternatively secured pension mean?
What is meant by “becoming entitled” to various kinds of pension?
What is meant by “entitled” to a pension?
A member with the expectation of receiving pension payments at sometime in the future is said to have a ‘prospective right’ to pension. This pension may be in any of the forms described in RPSM09100320. For the purposes of the legislation, the member only becomes ‘entitled’ to a pension benefit at the point when they first obtain an ‘actual right’ to receive it. This ‘actual right’ has to be distinguished from their ‘prospective right’. An ‘actual right’ is when a member has the right to a benefit without having to fulfil any further conditions or take any further actions, e.g.
- having to agree to or authorise the payment of a benefit, or
- having to obtain an employer’s or scheme trustee/scheme administrator’s agreement or co-operation to benefit payment.
Although the term ‘actual right’ refers to the receipt of real benefit, rather than merely being in possession of a right to obtain it, it does not necessarily refer to the date a benefit is actually paid out.
Entitlement to drawdown (before 6 April 2011 an unsecured) pension specifically arises whenever all or part of the sums and assets within a money purchase arrangement are designated to be available to pay a drawdown (before 6 April 2011 an unsecured) pension. See RPSM09102050 and example 5 below.
Before 22 June 2010, entitlement to an alternatively secured pension will generally arise when a member with an unsecured pension reaches age 75 and is not provided with a lifetime annuity or scheme pension at that point, unless the member is untraceable, in which case see RPSM09103108. If the member reached age 75 on or after 22 June 2010 and before 6 April 2011, see RPSM17100030. From 6 April 2011, unsecured pension and alternatively secured pension are replaced by drawdown pension (see RPSM09103050 onwards for more details).
Determining the point at which entitlement to a scheme pension or lifetime annuity actually arises can call for a more careful application of the principles explained above. Examples 1 - 5 show how this works in more detail.
Michael’s pension scheme rules state that pension benefits will come into payment on the member’s 65th birthday. This should happen automatically as Michael has notified the scheme of the option he wishes to exercise and has confirmed all the necessary information, for example bank details, to put the pension into payment. Michael is 65 on 15 September 2007 but his scheme experiences internal administrative delays and does not pay him any benefits until 1 October 2007, but Michael still has an actual right to the payment of benefits on his 65th birthday, so his benefit entitlement arises on 15 September, not the actual benefit payment date of 1 October.
The rules of Asif’s pension scheme state that a member may receive benefits from age 55 onwards and that benefits must come into payment by age 75. Asif is 57. Although Asif is eligible to take benefits from the scheme he has not yet opted to take benefits. So his right to benefits is prospective, not actual. He does not yet have any benefit entitlement.
This is a variation on Example 1.
The rules of Yvette’s pension scheme state that pension benefits will come into payment on the member’s 60th birthday. According to scheme records, Yvette’s 60th birthday is on the 13December 2006, so six months before that date, the scheme administrator writes to her last known address to ask what account she wants the benefits paid into. However there is no reply and the scheme is not able to contact Yvette to finalise the formalities. They are unable to make the payment on Yvette’s birthday in December. It is another year before they are able to trace her and details of the bank account to pay into are not confirmed to them until the 5 January 2008. Under the benefit rules of the scheme, Yvette’s benefits accrued to the 13 December 2006 and were due to be paid from that date, but by virtue of the matter-of-fact delay, Yvette’s entitlement remained a prospective one. Yvette has only become ‘actually entitled’ to the benefit for the purposes of the tax rules, on the 5thJanuary 2008. Under the rules of the scheme, the scheme also must pay arrears of pension for the period between the ‘potential entitlement’ on 13th December 2006 and the date of ‘actual entitlement’ on 5th January 2008. This is permitted under SI 2006 No 614 for defined benefit schemes and so the arrears of her scheme pension will be taxable pension’ income.
Kim has exercised her option to receive a lifetime annuity from an insurance company of her choice that does not underwrite the benefits in her pension scheme. There is an administrative delay within her scheme; payment of the consideration to the insurance company to purchase the annuity is delayed, and her lifetime annuity cannot start on time. Until the purchase price is passed to the insurance company, there can be no certainty that the annuity will be secured at a given rate, so the rights remain prospective, and actual entitlement is delayed until an insurance company does accept that payment of the consideration was made. Eventually an insurance company receives the payment for an immediate annuity and are then bound to pay out the annuity from whatever is the start date under the terms of the contract. The date on which payment was effectively made for the annuity becomes the date of ‘actual entitlement’. This is because although Kim completed all the steps that were required of her to obtain the benefit, it was not until payment of the consideration was made to the insurance company that one could define what the entitlement was to. The fact that the annuity is paid monthly in arrears does not affect the actual entitlement date. If the insurance company paying Kim’s annuity had an internal administrative delay resulting in the late payment of her annuity that would not have delayed her actual entitlement either. It is only the scheme delay that extended the final action that Kim performed in choosing the insurance company that would make the annuity payments.
On the 3rd of May 2012, Wale designates £10,000 from his pension fund as being available for the payment of a drawdown pension. He has made similar designations in the past. It is another two years before Wale actually starts to draw any pension from the designated funds. However for the purposes of the tax rules he is considered to have become actually entitled to a drawdown pension from the £10,000 designated on the 3rd of May 2012.