Schedule2
Part 1 – Death benefits: Nominees and successors
220.Paragraph 2(2) and (3) amend section 167 of FA 2004 to relax the existing requirement that pension death benefits for money purchase arrangements must be paid to a dependant, so that death benefits can also be paid to either a nominee or a successor. The amendments provide that a nominee can receive a nominees’ drawdown pension and a successor, a successors’ drawdown pension.
221.Paragraph 2(4) inserts new subsection (1A) into section 167 to provide that a beneficiary (that is, a dependant, nominee or successor) becomes entitled to income withdrawal when funds are designated as available for their dependants’, nominees’ or successors’ drawdown pension as appropriate.
222.Paragraph 2(5) amends section 167(2) to provide that a pension death benefit includes a pension payable to a successor on the death of a beneficiary.
223.Paragraph 3 inserts new paragraphs 27A to 27K into Schedule 28 of FA 2004. These new paragraphs provide definitions of nominee and successor as well as defining their respective drawdown pensions.
224.New paragraph 27A defines a nominee. A nominee can be any individual other than a dependant who is nominated by the member, or where there are no dependants and no individual or charity has been nominated by the member, any individual nominated by the scheme administrator.
225.New paragraph 27B defines nominees’ drawdown pension as a nominees’ short-term annuity (new paragraph 27C of Schedule 28) or nominees’ income withdrawal (new paragraph 27D of Schedule 28).
226.New paragraph 27C(1) defines a nominees’ short-term annuity. A nominees’ short term annuity is purchased on or after 6 April 2015 using sums or assets in a nominee’s flexi-access drawdown fund (new paragraph 27E of Schedule 28) and must be payable by an insurance company. It can be payable for no more than 5 years and must end before the death of the nominee. These requirements are similar to those for a dependants’ short-term annuity that is purchased on or after 6 April 2015.
227.New paragraph 27C(2) and (3) contain powers for HMRC to make regulations in respect of nominees’ short-term annuities for cases where the annuity ceases and the sums or assets are transferred to provide a new nominees’ short-term annuity. Regulations under these powers may prescribe the extent to which, following a transfer, a new nominees’ short-term annuity is to be treated as if it were the original nominees’ short-term annuity.
228.New paragraph 27D defines nominees’ income withdrawal as any amount that the nominee is entitled to receive from their nominee’s flexi-access drawdown fund, other than payments of a short-term annuity.
229.New paragraph 27E defines a nominee’s flexi-access drawdown fund as one where funds have been newly-designated (new paragraph 27E(2)). As with a dependant, a nominee will be able to designate any uncrystallised funds, or any unused drawdown funds that the member had on their death, to a nominee’s flexi-access drawdown fund.
230.New paragraph 27E(2) defines newly-designated funds as those funds that have been designated as available for the payment of a nominees’ drawdown pension on or after 6 April 2015 and were unused drawdown funds or unused uncrystallised funds immediately before being designated plus any sums or assets that derive from these funds.
231.New paragraph 27E(3) defines unused drawdown funds as any drawdown funds in respect of the member that, just before the member’s death, had not been used to pay income withdrawal or a short-term annuity plus any sums or assets that derive from these funds.
232.New paragraph 27E(4) and (5) define when sums or assets are unused uncrystallised funds. For cash balance arrangements this is any sums or assets that the member could have been entitled to immediately before their death, and which since the member’s death have not been designated for dependants’ or nominees’ drawdown pension, or to provide a dependants’ annuity or scheme pension. For other money purchase arrangements this is any sums or assets held in the arrangement that had not been designated for the member’s own drawdown or used to provide a scheme pension for the member or any dependant immediately prior to the member’s death, and have not been used since the member’s death for a dependants’ annuity or a dependants’ scheme pension, or designated as available for either dependants’ or nominees’ drawdown pension.
233.New paragraph 27F defines a successor. A successor is someone who inherits any unused drawdown funds on the death of a dependant, a nominee or a successor. A successor can be anyone nominated by the previous beneficiary or where no nomination has been made by the previous beneficiary, an individual nominated by the scheme administrator. As these changes do not impose any limit on how many times unused funds can be passed on, successors’ flexi-access drawdown funds that are unused at the time of the successor’s death will also be capable of being passed to another nominated successor.
234.New paragraph 27G defines successors’ drawdown pension as a successors’ short-term annuity (new paragraph 27H of Schedule 28) or successors’ income withdrawal (new paragraph 27J of Schedule 28).
235.New paragraph 27H(1) defines a successors’ short-term annuity. The requirements for a successors’ short-term annuity are similar to those for a nominees’ short-term annuity.
236.New paragraph 27H(2) and (3) contain powers for HMRC to make regulations in respect of successors’ short-term annuities for cases where the annuity ceases and the sums or assets are transferred to provide a new successors’ short-term annuity. Regulations under these powers may prescribe the extent to which, following a transfer, a new successors’ short-term annuity is to be treated as if it were the original successors’ short-term annuity.
237.New paragraph 27J defines successors’ income withdrawal as any amount that the successor is entitled to receive from their successor’s flexi-access drawdown fund, other than payments of a short-term annuity.
238.New paragraph 27K defines a successor’s flexi-access drawdown fund. The requirements for a successor’s flexi-access drawdown fund are similar to those for a nominee’s flexi-access drawdown fund. However successors will only be able to designate into their flexi-access drawdown fund unused drawdown funds, as there will be no uncrystallised funds available to successors. This is because the preceding dependant or nominee will have already crystallised any uncrystallised funds on the death of the member, either through the payment of a lump sum death benefit or by designating the uncrystallised funds to drawdown on their own account. Where the intended dependant or nominee dies before receiving the funds, then those funds can be paid to an alternative dependant or nominee, rather than a successor.
239.Paragraphs 4 to 14 make a number of amendments to FA 2004 as a consequence of the introduction of the terms ‘nominee’ and ‘successor’ in paragraph 3. These ensure that where the legislation refers to a dependant or a dependant’s drawdown pension fund or a dependant’s flexi-access drawdown fund, additional references are inserted to a nominee or successor or a nominee’s flexi-access drawdown fund or successor’s flexi-access drawdown fund as appropriate.
240.Paragraph 15 amends paragraph 18 of Schedule 29 and widens the circumstances when a charity lump sum death benefit can be paid. Currently a lump sum can be paid on the death of the member or dependant, to a charity nominated by them provided that there are no (or no other) dependants. The amendment enables a charity lump sum death benefit to be paid where there are unused funds in a nominee’s or successor’s flexi-access drawdown fund at their death and there are no dependants of the member. If no charity has previously been nominated by the member, the nominee or successor may choose the charity to benefit on their own death.
241.Paragraph 16 amends the Registered Pension Schemes (Transfers of Sums and Assets) Regulations 2006 (SI 2006/499), to provide that a transfer of a nominee’s or successor’s flexi-access drawdown fund to a similar drawdown fund in another registered pension scheme is a recognised transfer and therefore an authorised payment. This ensures that no tax charges will arise in connection with the transfer.
Part 2 – Lump sum death benefits
242.Paragraphs 17 amends section 206 of FA 2004 as it relates to the special lump sum death benefit charge that arises where certain lump sum death benefits are paid where the member has reached age 75 at the time of their death. In section 2 of this Act, the charge that applies is reduced from 55% to 45%.
243.Paragraph 17(2) inserts new subsection (1ZA) into section 206 of FA 2004 which provides that references to a member and their death, are to be read as also applying to a dependant, nominee or successor and their death, so that the charge may also arise where a flexi-access lump sum death benefit is paid from a dependant’s, nominee’s or successor’s flexi-access drawdown fund, or where a drawdown pension fund lump sum death benefit is paid from a dependant’s drawdown pension fund.
244.Paragraph 17(3) inserts new subsections (1B) and (1C) into section 206 of FA 2004.
245.New subsection (1B) provides that the special lump sum death benefits charge also applies if a member dies before age 75, and a drawdown pension fund lump sum death benefit, a flexi-access drawdown fund lump sum death benefit or an uncrystallised funds lump sum death benefit is paid outside a two-year period. The two-year period starts on the date on which the scheme administrator first knew of the member’s death or, if earlier, the day when they could first reasonably have been expected to know of it. Currently where a lump sum death benefit is not paid within this period it is an unauthorised payment and is subject to tax charges of up to 70%.
246.New subsection (1C) provides that the special lump sum death benefit charge also applies if a beneficiary dies before age 75, and prescribed lump sum death benefits are paid outside the two-year period.
247.Paragraphs 17(4) and (5) and 18 make further consequential changes.
248.Paragraph 19 makes a number of amendments in connection with the uncrystallised funds lump sum death benefit.
249.Paragraph 19(1) amends paragraph 15 of Schedule 29 to remove the requirement that, to be an authorised payment, the lump sum must be paid within a two-year period.
250.Paragraph 19(2) amends paragraph 16 of Schedule 32 which sets out which lump sum death benefits are relevant lump sum death benefits and are tested against the member’s lifetime allowance as a BCE 7. The amendment means that an uncrystallised funds lump sum death benefit is only tested against the lifetime allowance if it will be paid tax-free, that is, if it is paid where the member died before age 75 and is paid within a two-year period.
251.Paragraph 19(3) amends section 636A of ITEPA 2003 to provide that an uncrystallised funds lump sum death benefit is subject to income tax only under section 206 of FA 2004, that is, only where either the member died after reaching age 75 or the member died before reaching age 75 and the lump sum was not paid within the two-year period.
Part 3 – Uncrystallised rights at member’s death
252.Paragraph 21 inserts a new benefit crystallisation event 5C (BCE 5C) into section 216(1) of FA 2004. BCE 5C provides that any funds designated into a dependant’s or a nominee’s flexi-access drawdown fund will be tested against the member’s lifetime allowance if the member was under the age of 75 when they died and the funds are designated within the relevant two-year period. The amount that is tested against the member’s lifetime allowance will be the total of the sums and assets designated as available for drawdown. Where the member does not have sufficient lifetime allowance remaining at the time of their death, the excess will be subject to the lifetime allowance charge. This test ensures that unlimited amounts of tax-relieved pension savings cannot be passed on entirely tax-free.
253.Paragraph 22 amends section 217 of FA 2004 to provide that the person liable to any lifetime allowance charge arising as a result of new BCE 5C, will be the dependant or nominee as appropriate. That is, the charge will be the sole liability of the recipient.
254.Paragraph 23 amends section 219 of FA 2004 to provide that where there is more than one relevant post-death crystallisation event (BCE 5C and/or BCE 7) in respect of the member, the BCE are to be treated as occurring immediately before the member’s death, but after the entitlement to any pension commencement lump sum.
255.Paragraph 24(2) amends paragraph 1 of Schedule 32 to provide that where a BCE 5C or BCE 7 occurs, the relevant pension schemes are the registered pension schemes that the individual was a member of immediately before their death.
256.Paragraph 24(3) inserts new paragraphs 14B and 14C into Schedule 32. New paragraph 14B defines the relevant two-year period for the purposes of BCE 5C as the period starting on the date on which the scheme administrator first knew of the member’s death or, if earlier, the day when they could first reasonably have been expected to know of it. New paragraph 14C defines relevant unused uncrystallised funds for the purposes of BCE 5C as any unused uncrystallised funds as defined in new paragraph 27E(4) and (5) of Schedule 28 (as inserted by paragraph 3 of Schedule 2) but only where the member dies before reaching age 75.
Part 4 – Income tax on beneficiaries’ income withdrawal
257.Paragraph 25 amends ITEPA 2003.
258.Paragraph 25(2) and (3) amend sections 573 and 574 of ITEPA 2003, so that the tax treatment that applies to income withdrawal paid under a registered pension scheme (section 579CZA of ITEPA 2003) will apply where an equivalent pension is paid from a non-UK scheme as defined in section 574(1)(ba) or (bb) of ITEPA 2003.
259.Paragraph 25(2) inserts new subsections (2A) to (2D) into section 573.
260.New subsection (2A) provides an exemption from the current rules that all payments of foreign pension to a UK resident are included in the recipient’s taxable income. It provides that where an amount is paid from a non-UK pension scheme that is the equivalent of dependants’ or nominees’ income withdrawal in respect of a deceased member who had not reached age 75 at death, and no payments of pension had been made from that fund before 6 April 2015, the payment is not to be included in the recipient’s taxable income.
261.New subsection (2B) provides that the exemption from tax will also apply to a pension within section 574(1)(bb) (that is, the equivalent of successors’ income withdrawal paid from a non-UK pension scheme) in respect of an individual who had not reached age 75 at death.
262.New subsection (2D) provides that the tax charge in section 574 will nevertheless apply where a member dies before age 75, and designation to drawdown is not made within the two-year period.
263.Paragraph 25(3) inserts new section 574(1)(ba) and (bb) which extend the meaning of foreign pension to include amounts paid that would be nominees’ or successors’ income withdrawal if paid from a registered pension scheme.
264.Paragraph 25(5) inserts new section 579CZA that provides exemptions from the current rules that all payments of pension from a registered pension scheme are included within the recipient’s taxable income. New section 579CZA(1) provides that where there is a payment of income withdrawal from a dependant’s or nominee’s drawdown fund, then this payment is not included in the recipient’s taxable income. However this exemption only applies where the member had not reached age 75 at the date of their death and is subject to new section 579CZA(4) to (6).
265.New section 579CZA(2) provides a similar exemption for payments of income withdrawal from a successor’s flexi-access drawdown fund where the previous beneficiary died before reaching age 75.
266.New section 579CZA(4) and (5) provide that subsection (1) doesn’t exempt any payments of income withdrawal on or after 6 April 2015 if prior to this date there has been a drawdown payment from the funds concerned.
267.New section 579CZA(6) provides that subsection (1) doesn’t exempt relevant unused uncrystallised funds designated into the dependant’s or nominee’s flexi-access drawdown fund outside the two-year period.
268.New section 579CZA(7) to (9) provide various definitions for the purposes of new section 579CZA.
269.Paragraph 25(7) provides that the amendments made by paragraph 25(2) to (5) only apply to pension paid on or after 6 April 2015.
