RPSM17100080 - Technical pages: Treatment of persons at age 75: Examples

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.

Examples

Example 1 - an unsecured pension has been drawn from an arrangement before 22 June 2010

Harry draws all his benefits from a money purchase arrangement on his 71st birthday on 30 June 2006. He takes the maximum pension commencement lump sum and opts to use the remaining funds to generate an unsecured pension. When Harry reaches age 75 on 30 June 2010, under the current tax rules, he effectively has 2 options - he can continue income withdrawal beyond his 75^th birthday but only as an alternatively secured pension subject to more stringent rules or he can purchase a lifetime annuity.

Under the new tax rules, which apply to Harry as he does not reach age 75 until on or after 22 June, Harry can now choose for the fund to be used to purchase a lifetime annuity or to provide a scheme pension or to continue to be available to pay an unsecured pension until his 77^th birthday. One effect of this change is that there is no need for an automatic review of the unsecured pension basis and limits at age 75 although a review may be required in the same circumstances as apply before age 75. Consequently, the current reference period must end on 29 June 2011, 5 years after the last review. Under the interim rules Harry’s final unsecured pension year does not end on his 75^th birthday.

If Harry were to die after reaching the age of 75 but before his 77th birthday, any funds remaining in the unsecured pension fund relating to the arrangement under the registered pension scheme may be paid out as an unsecured pension fund lump sum death benefit. These will be liable to the 35% special lump sum death benefits charge,

Example 2 - an unsecured pension has been not drawn from an arrangement

Harry has funds of £40,000 under his money purchase arrangement. His 75th birthday is on 30 June 2010. He has not drawn any benefits under the arrangement. On reaching age 75, under the current rules Harry effectively has 2 options. He can commence income withdrawal from his 75th birthday as an alternatively secured pension or he can purchase a lifetime annuity.

Under the new tax rules, which apply to Harry as he does not reach age 75 until on or after 22 June 2010, Harry can now choose for the fund to be used to purchase a lifetime annuity or to provide a scheme pension or made available to pay an unsecured pension until his 77th birthday. He may also be able to take a pension commencement lump sum if his pension scheme trustees or manager decide to allow this (see RPSM17100040).

The whole of the funds, £40,000, will be deemed to be crystallised by a benefit crystallisation event 1. The amount crystallised for the purposes of the lifetime allowance test will include the amount of the PCLS whether or not this is actually paid. The value of the benefit crystallisation event 1 includes the amount available to provide a pension commencement lump sum i.e. there is no benefit crystallisation event 6.

Harry then has 12 months in which the lump sum entitlement can be taken as a pension commencement lump sum. If all, or part, of the lump sum part of the fund is not taken as pension commencement lump sum before the 12 month window expires then that part is automatically designated as being available to pay unsecured pension after 12 months. Before the 12 month window expires Harry may if he wishes designate the lump sum part of his fund as being available to pay additional unsecured pension. Whichever of these alternatives occurs there is no need for a lifetime allowance test (because the lump sum part of the fund was already tested immediately before Harry’s 75th birthday).

If Harry dies, within the 12 month payment period but before taking the lump sum any funds remaining in the unsecured pension fund relating to the arrangement under the registered pension scheme may be paid out as an unsecured pension fund lump sum death benefit. This will include any unpaid lump sum entitlement. The amounts paid out on death will be liable to the 35% special lump sum death benefits charge.

Example 3: Purchasing a further short-term annuity contract

In January 2007 James decided to take benefits from all of his funds in a money purchase arrangement. James takes his maximum tax free pension commencement lump sum. He chooses to take the rest as an unsecured pension. In January 2008, James bought a short-term annuity contract providing an annuity in place of part of his unsecured pension. Under the current tax rules the term of that annuity contract cannot be more than five years and must not extend beyond the member’s 75th birthday. James reaches the age of 75 on 30 June 2010 so the short-term annuity bought in January 2008 is payable until 29 June 2010.

James decides he would like to continue with a short-term annuity beyond age 75. Under the new tax rules, which apply to James as he does not reach age 75 until on or after 22 June, he can purchase another short-term annuity provided it ends before he reaches age 77. James cannot extend the term of the original annuity contract, he must purchase a new short-term annuity. This must not exceed 5 years or extend beyond James’s 77^th birthday. On 30 June 2010, following expiry of the term of the original annuity, James purchases a new short-term annuity for the period from 30 June 2010 to 29 June 2012, i.e. the day before his 77^th birthday.

The remaining unsecured pension funds after the purchase of the new short-term annuity remain available for the payment of unsecured pension and this may continue to age 77 (see Example 1)