RPSM17100030 - Technical pages: Treatment of persons at age 75: Member’s pension

This guidance covers individuals who reached age 75 between 22 June 2010 and 5 April 2011.

For individuals who reached age 75 before 22 June 2010 or after 5 April 2011 see the guidance starting at RPSM09100000 and RPSM10100000.

Changes for the transitional period: member’s pension

Unsecured Pension

The way in which pension rules 4 and 6 in section 165 Finance Act 2004 apply is modified to allow an unsecured pension to be paid up to the age of 77 (rather than as previously to the age of 75) to a member who has not reached the age of 75 by 22 June 2010 as an authorised payment of pension. Where an individual has already reached the age of 75 before 22 June 2010 they will have already arranged to receive one of an alternatively secured pension, a lifetime annuity or a scheme pension before that date. Such individuals are outside the scope of the transitional changes. In particular, an individual in alternatively secured pension remains in alternatively secured pension.

For those who are affected by the change i.e. those who have not reached the age of 75 by 22 June 2010, the effect of the new rules means that from 22 June 2010 a money purchase arrangement may provide a pension income through any of the following:

• a lifetime annuity,
• a scheme pension,
• the provision of an unsecured pension (up to the age of 77 only) or
• the provision of an alternatively secured pension (from the age of 77).

An individual with an unsecured pension before 22 June 2010 will consequently be able to keep their unsecured pension until his or her 77th birthday.

For those affected by the changes there is however no change to the position that on reaching 75 they cannot leave their funds uncrystallised. The deemed designation of uncrystallised funds as available to pay an unsecured pension will occur as before but the funds then stay in the unsecured pension fund and will not become an alternatively secured pension fund until they reach the age of 77.

The new rules amend the definition of the unsecured pension year to apply so that the last year does not automatically end at the age of 75 but continues until the age of 77. This means that the basis amount and the limits on income withdrawals will be determined on the normal unsecured pension basis in the same way as for a member aged under 75 until the member reaches the age of 77. One effect of this change is that there is no need for an automatic review of the unsecured pension basis and limits at the age of 75 although a review may be required in the same circumstances as apply before the age of 75. For more detail see the guidance in the Registered Pension Schemes Manual at pages RPSM09102310 (initial unsecured pension limit) and RPSM09102420 (review of unsecured pension limit) onwards substituting age 77 for age 75 where this appears.

When calculating the maximum income withdrawal for Pension rule 5 (in section 165 Finance Act 2004) relating to an individual aged over 75, the basis amount will be determined as now by reference to the tables published by the Government Actuary’s Department as if the individual were aged 75.

The result of the changes is that from the age of 75, a member with funds held in the arrangement that they have chosen not to draw as benefits (including as an unsecured pension) before the age of 75 will until reaching the age of 77 be in precisely the same tax position as an individual who voluntarily designated sums and assets as available for an unsecured pension at a time before their 75th birthday.

Alternatively Secured Pension

The definition of an alternatively secured pension fund in Pension Rule 6 is amended so that it is not created until the age of 77 in the case of a member who has not reached the age of 75 before 22 June 2010. The 55% minimum and 90% maximum limits in section 181A and pension rule 7 respectively will continue to apply to those receiving an alternatively secured pension.

Lifetime allowance: Crystallised funds on reaching age 75 on or after 22 June 2010

There is no change to the way in which the lifetime allowance rules apply when the member with a money purchase arrangement reaches the age of 75 on or after 22 June 2010.

Where before 22 June 2010 a member has crystallised part of their pension funds by designating it to provide unsecured pension then, on reaching the age of 75 there will still need to be a benefit crystallisation event (BCE) 5A test in respect of the crystallised fund.

The amount crystallised on the member reaching the age of 75 will be:

the amount of the sums or assets representing the unsecured pension fund of the member LESS 

the amount (or the appropriate amount) of the amounts originally crystallised under BCE 1 when the member designated funds as available for unsecured pension.

For more detail see the guidance at RPSM11104640.

Lifetime allowance: Uncrystallised funds on reaching age 75 on or after 22 June 2010

There is no change to the way in which the lifetime allowance rules apply when the member with a money purchase arrangement reaches the age of 75 on or after 22 June 2010.

Any uncrystallised funds held immediately before the member’s 75^th birthday on or after 22 June 2010 will still be tested against the member’s lifetime allowance as a BCE1, and so potentially be subject to the lifetime allowance charge, immediately before the member’s 75^th birthday. The uncrystallised funds will be treated as having been designated by the member as available for payment of an unsecured pension rather than going immediately into an alternatively secured pension fund from age 75. The member then remains in the unsecured pension fund so created until their 77^th birthday i.e. they won’t move into alternatively secured pension until they reach the age of 77. See the guidance at RPSM09102010 onwards for more detail on designating uncrystallised funds.

The BCE1 will include the funds available for the provision of a pension commencement lump sum (see RPSM17100040).

Any resulting income withdrawal will be subject to tax as pension income in the normal way.

Short-term annuities

Where a member who is aged less than 75 before 22 June 2010 purchased a short-term annuity before that date then, under the existing tax rules, that annuity must end on or before the date on which the member reaches the age of 75. Where this occurs on or after 22 June 2010 and the member wishes to continue receiving an annuity they will need to purchase a new short-term annuity. It will not be enough for the term of an existing short-term annuity contract taken out before 22 June 2010 to be extended as this may mean the term of the annuity would exceed 5 years meaning it would cease to be a short term annuity. This would mean that all payments of the annuity would be unauthorised payments subject to extra tax charges. So the transitional tax rules allowing a short-term annuity with a term that ends before the member reaches the age of 77 will only apply to annuities purchased on or after 22 June 2010.

For more detail see the guidance on short-term annuities see RPSM09102040.

Untraceable members

Under the current tax rules, if on a member’s 75^th birthday the scheme administrator, after taking reasonable steps, has not been able to ascertain their whereabouts, any arrangement where none of the funds were previously designated by the member into unsecured pension will not automatically be treated as becoming held in an alternatively secured pension fund. Instead the funds are treated as being held ‘in suspense’ until the member has ultimately been traced at which time a pension is established in one of a number of ways.

The current rules are modified so that the current rules applying to untraceable members will not apply until the member’s 77^th birthday.

However, the normal lifetime allowance test for BCE 1 will still need to be carried out when the member reaches the age of 75. The test is carried out as though the member had, immediately before reaching the age of 75, designated the whole of the their uncrystallised funds under the arrangement as available for the payment of unsecured pension.

For more detail see the guidance on untraceable members at RPSM09103108.