RPSM09102620 - Technical Pages: Member benefits: An unsecured pension: Applying the unsecured pension limit in practice: Income withdrawal and short term annuity

This guidance only covers members who became entitled to an unsecured pension before 6 April 2011. See RPSM09103500 if the member became entitled to their pension on or after 6 April 2011.

Applying the unsecured pension limit in practice with income withdrawal payments where a short-term annuity contract has also been purchased

Where a short-term annuity contract is purchased the majority of the funds designated to provide that unsecured pension will normally remain within that unsecured pension fund. The residual unsecured pension fund may be used in the future to generate further unsecured pension, either through the purchase of more short-term annuity contracts or direct from the arrangement through income withdrawal.

If the member is drawing unsecured pension through a combination of income withdrawals and short-term annuity contracts the scheme administrator needs to keep track of the income provided by the short-term annuity contract when considering the maximum level of income withdrawals that can be paid direct from the scheme in a pension year. The scheme administrator needs to consider not only what income has already been paid (or accrued) by that contract in that pension year, but what will be paid (or accrue) later in that year.

Where the scheme administrator is unsure of the future unsecured pension that will accrue under a short-term annuity contract (e.g. because it is linked to RPI or is a with-profits annuity) they may need to err on the side of caution when authorising income withdrawal payments. For example, the scheme administrator may need to hold back payments until the position is clear, then pay a ‘top-up’ income withdrawal payment towards the end of the pension year.

RPSM09102630 gives some examples.

The future level of unsecured pension provided under existing short-term annuity contracts needs to be considered before any of the remaining unsecured pension fund is used to purchase a lifetime annuity or a scheme pension, or where the member is considering increasing those funds through additional fund designation. This is so the scheme administrator can ensure that the revised limit imposed following those review triggers can accommodate the existing short-term annuity income. For the same reason care needs to be taken where a short-term annuity contract is purchased where the term spans a formal five-year review point.

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