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.