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?

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 60^th 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 5^thJanuary 2008. Under the rules of the scheme, the scheme also must pay arrears of pension for the period between the ‘potential entitlement’ on 13^th December 2006 and the date of ‘actual entitlement’ on 5^th 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 3^rd 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 3^rd of May 2012.