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Rent with option to buy agreement forms
It may be purchased from either uncrystallised funds, a drawdown pension fund or a flexi-access drawdown fund. From 6 April onwards, to meet the lifetime annuity definition the following conditions must be met:. Where the member became entitled to the annuity before 6 April , the conditions for meeting the lifetime annuity definition were that the annuity contract must:. Any payment or benefit from a lifetime annuity contract is treated as if it was made by the registered pension scheme that purchased the contract.
This is for the scheme administrator or insurance company to ascertain, seeking legal opinion where necessary. See PTM for more details. But where a pension scheme provides a pension by purchasing a lifetime annuity from uncrystallised funds, a lump sum payment paid in connection with the annuity purchase may qualify as a pension commencement lump sum.
Even if the lump sum payment was made before the annuity was purchased, it may still qualify as a pension commencement lump sum providing it was made in the 6 months before the date on which the annuity was purchased and providing the other conditions for a pension commencement lump sum are all satisfied. If the member dies after receiving the lump sum, but before the annuity is purchased, the legislation deems the entitlement to the lump sum to have arisen immediately before their death.
This guidance only applies where the member became entitled to their lifetime annuity before 6 April Tax reliefs are given to encourage pensions saving, so it is important that the tax rules ensure that the pension funds are used for the intended purpose of funding pensions for the life of the member.
To ensure that this continues to be the case, there are safeguards within the rules to ensure that a lifetime annuity contract provides a stable and predictable source of income. The legislation only allows a lifetime annuity contract to provide for an income that decreases over time in very specific and controlled circumstances. These circumstances are set out in regulations see later below for more details.
Any annuity in which the amount payable either stays level or increases will come within the definition of a lifetime annuity. The amount of income provided by the contract may only be varied by reference to other factors, where that factor is specifically provided for in regulations. Again, see later below for further details. If the contract provides an income that decreases in circumstances other than provided in the regulations then the contract is not within the lifetime annuity definition.
The purchase of that contract will represent an unauthorised member payment unless it is being used to secure a scheme pension liability. An exception to this rule is that a lifetime annuity can be reduced to give effect to a pension sharing order as explained below.
The level of lifetime annuity payable can be reduced due to the application of a pension sharing order. If an annuitant with a lifetime annuity contract becomes subject to a pension debit under a pension sharing order, the amount of that annuity will have to reduce in order to comply with the order.
Without an exemption in the legislation, a reduction in the level of annuity payable to the annuitant would contravene the requirement that the amount of the annuity cannot decrease. The legislation specifically caters for a reduction in these circumstances.
The annual amount payable to an annuitant from a lifetime annuity may vary from year to year but the circumstances in which the annual amount payable in any year can fall below the amount paid in the previous year are limited.
However, providing the annual amount is determined in accordance with one of the following alternative methods we would not consider that any reduction in the annual amount would be subject to the tax charges set out under Consequences of reducing or stopping a scheme pension, other than in the exempted circumstances.
Using this method variations in the annual amount paid from year to year must be determined in accordance with the following conditions. The first condition is where the amount of the annuity payable is linked to any of the factors specified in Methods One, Two or Three or any combination of those factors. The second condition is that a review must be conducted, by the insurance company by whom the annuity is provided, at least once every 5 years of the value of the sums and assets which are applied towards the provision of the annuity.
The third condition is that at the time of the review, the maximum and minimum amount of income that may be drawn in each year until the next review must be determined. If a joint life annuity has been purchased, then it means a joint life level annuity with the same profile between the joint lives as that actually purchased. Likewise if the annuity being purchased is not an impaired life annuity then one should not compare it with an impaired life level annuity.
The minimum amount of income which the annuitant may draw is half of the annual rate of a level annuity which could be paid upon the assumptions in the preceding paragraph of this condition. For the purposes of this Method, the annual rate of an annuity which could be purchased with the sums and assets applied to its provision shall be assumed to be:.
Method Five Flexible Annuity cannot be used for a short-term annuity. Where this page is being read to establish the requirements regarding the above kinds of annuities, the reference to member in Method Four should be replaced by dependant, nominee or successor as appropriate. The member must be given the opportunity to choose the insurance company a lifetime annuity is purchased from. This facility is generally referred to as an open market option. The definition of a lifetime annuity specifically requires that the member must have the option of choosing the contract provider.
This is an explicit requirement of the legislation and helps to ensure flexibility for those providing for their retirement. If the member fails to select an insurance company to provide the lifetime annuity then the scheme administrator or scheme trustees may select the insurance company. The requirement is that the member must have the opportunity to select the insurance company. If they fail to take that opportunity then the onus falls on to the scheme administrator or scheme trustees.
Even where a money purchase scheme provides the member with the option of a scheme pension, the member must still be given the opportunity of choosing to go down the lifetime annuity route using the open-market option. Where the contract is purchased from uncrystallised funds, a lump sum paid in connection with the annuity purchase may be paid tax-free if it satisfies the requirements for a pension commencement lump sum.
The legislation defines the circumstances where a tax-free lump sum may be paid, and the maximum amount. To be treated as a pension commencement lump sum, the lump sum payable under the scheme must be linked to the arising entitlement to a lifetime annuity. But this may be under a different arrangement in the same registered pension scheme see PTM It must be paid within an month period beginning 6 months before the purchase of the lifetime annuity contract and ending 12 months after it.
The maximum amount that may be paid as a pension commencement lump sum is one third of the annuity purchase price. This will correspond with the amount that will crystallise for lifetime allowance purposes at that point through benefit crystallisation event BCE 6.
If protection of benefits existing on 6 April is an issue, see PTM The insurance company guarantees that payments will continue under that contract for a given term even if the member dies before that term has ended. The term runs from the date the member first becomes entitled to that lifetime annuity the point the contract was purchased.
Guarantees are explained in more detail though regarding scheme pensions at PTM The lifetime annuity contract may provide a guarantee even if earlier pension entitlements under the arrangement were similarly provided with a guarantee, for example under a short-term annuity contract.
The contract may provide that any guarantee entitlement ends on the recipient of the continuing annuity payments:. See guidance below for the taxation of those continuing term-certain payments Taxation of a lifetime annuity contract. A lifetime annuity contract may provide a member with annuity protection.
Whether or not a contract provides this protection will be decided on purchase, and be expressly provided for in the contract. This protection will be costed into the annuity price. The maximum protection that can be provided is the capital value of the lifetime annuity benefit that crystallises for lifetime allowance purposes at the time the contract was purchased through benefit crystallisation event BCE 4. This will be the purchase price of the annuity.
So the maximum protection that may be provided will be the whole cost of the contract. This maximum applies to the total of such benefits paid under the contract and is not indexed in any way over time. The maximum annuity protection lump sum death benefit that can be provided through a lifetime annuity contract is expressed in the legislation through the following formula:. A lifetime annuity contract is purchased for David from uncrystallised funds.
The pension payer must deduct income tax under the PAYE rules before paying the pension income to the member. The taxable pension income for a tax year is the full amount of annuity income that accrues in that year under the terms of the contract irrespective of when any amount is actually paid. Where the member dies after becoming entitled to a lifetime annuity, and payments continue under the contract because of a guarantee, the recipient of the continued payments is also taxed in exactly the same way as above, unless all of the following points apply:.
However, the above-mentioned regulations permit an insurance company to transfer to another insurance company sums or assets relating to their liability under a lifetime annuity contract. The relevant regulation requires the new lifetime annuity to be treated as if it were the original lifetime annuity for certain prescribed purposes of the pensions tax rules see list below.
Otherwise, the registered pension scheme under which sums and assets were used to buy the original lifetime annuity is treated as making an unauthorised member payment. The amount of the unauthorised payment is equal to the total amount of sums and the market value of the assets transferred to the new lifetime annuity provider.
The new lifetime annuity must be treated as if it were the original lifetime annuity for the purposes of:. In all other respects the new lifetime annuity is treated as exactly that so the annuity terms can be reshaped, for example to provide a single annuity where the original lifetime annuity included provision for a spouse who has subsequently predeceased the member or to provide a fresh guarantee for up to 10 years whether or not the original annuity made such provision.
There is no obligation requiring an insurance company to either make or accept a transfer of a lifetime annuity liability. It is not something the member can instigate without the agreement of the insurance company concerned.
There would also need to be agreement between the two insurance companies on the value of the annuity business in question based on an analysis of the policy terms and conditions. The only benefits a lifetime annuity contract as secured from a money purchase arrangement can provide on the death of the annuitant are as follows:. More than one of the above benefits may be provided by a lifetime annuity contract on the death of the member.
If there is more than one dependant then each may be given a death benefit under the contract. Any other benefit provided on the death of the annuitant will not be an authorised member payment and will be taxed as an unauthorised member payment chargeable on the recipient - see PTM A lifetime annuity contract purchased by a pension scheme within the categories listed in paragraph 1 1 a to g in Schedule 36, Finance Act before 6 April and in payment on 5 April is not a registered pension scheme and so it is not generally within the rules in Part 4 of the Finance Act This remains the case for so long as the terms of the annuity contract continue unaltered post 5 April The annuity contract does not come within the new tax rules.
This means that any payments or benefits under the annuity are treated as made or provided from sums or assets held for the purposes of a registered pension scheme. The Article also deals with the position where such annuity contracts were purchased prior to 6 April by approved pension schemes which were wound-up prior to that date.
The Article modifies the wording in section 4 Finance Act in respect of this category of pension scheme so that the payment out of the annuity contract is deemed to be made by a registered pension scheme. To help us improve GOV. It will take only 2 minutes to fill in.
Skip to main content. Requirements where the member became entitled to the annuity on or after 6 April Paragraph 3 Schedule 28 Finance Act Paragraph 13 Schedule 10 Finance Act From 6 April onwards, to meet the lifetime annuity definition the following conditions must be met: