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What is meant by 'becoming entitled' to various types of pension

What is meant by 'becoming entitled' to various types of pension

A member with the expectation of receiving pension payments at some time in the future is said to have a 鈥榩rospective right鈥� to pension.听For the purposes of the legislation, the member only becomes 鈥榚ntitled鈥� to a pension benefit at the point when they first obtain an 鈥榓ctual right鈥� to receive it. This 鈥榓ctual right鈥� has to听be distinguished from their 鈥榩rospective right鈥�.听An 鈥榓ctual right鈥� is when a member has the right to a benefit without having to fulfil any further conditions or take any further actions, for example:听

Although the term 鈥榓ctual right鈥� refers to the receipt of real benefit, rather than merely being in possession of a right to obtain it, it does not necessarily refer to the date a benefit is actually paid out.听

Entitlement to drawdown pension specifically arises whenever all or part of the sums and assets within a money purchase arrangement, that is not a collective money purchase arrangement, are designated听to be available to pay a drawdown pension. See example 5 below.听

Determining听the point at which entitlement to a scheme pension or lifetime annuity actually arises听can call for a more careful application of the principles explained above. Examples 1 to 5 show how this works in more detail.听

Example 1听

Michael鈥檚 pension scheme rules state that pension benefits will come into payment on the member鈥檚 65th birthday. This should happen automatically as Michael has notified the scheme of the option听he wishes to exercise and has confirmed all the necessary information, for example bank details, to put the pension into payment. Michael is 65 on 15 September but his scheme experiences internal administrative delays and does not pay him any benefits until 1 October that year, but Michael still has an actual right to the payment of benefits on his 65th birthday, so his benefit entitlement arises on 15 September, not the actual benefit payment date of 1 October.听

Example 2听

The rules of Asif鈥檚 pension scheme state that a member may receive benefits from age 55 onwards and that benefits must come into payment by age 75. Asif is 57. Although Asif is eligible to take benefits from the scheme听he has not yet opted to take benefits. So, his right to benefits is prospective, not actual. He does not yet have any benefit entitlement.听

Example 3听

This is a variation on example 1.听

The rules of Yvette鈥檚 pension scheme state that pension benefits will come into payment on the member鈥檚 60th birthday. According to scheme records, Yvette鈥檚 60th birthday is on the 13 December 2013, so 6 months before that date, the scheme administrator writes to her last known address to ask what account she wants the benefits paid into. However, there is no reply听and the scheme is not able to contact Yvette to finalise the formalities. They are unable to make the payment on Yvette鈥檚 birthday in December. It is another year before they are able to听trace her and details of the bank account to pay into are not confirmed to them until the 5 January 2015. Under the benefit rules of the scheme, Yvette鈥檚 benefits accrued听to the 13 December 2013 and were due to be paid from that date, but by virtue of the matter-of-fact delay, Yvette鈥檚 entitlement remained a prospective one. Yvette has only become 鈥榓ctually entitled鈥� to the benefit for the purposes of the tax rules, on the 5 January 2015. Under the rules of the scheme, the scheme also must pay arrears of pension for the period between the 鈥榩otential entitlement鈥� on 13 December 2013 and the date of 鈥榓ctual entitlement鈥� on 5 January 2015. This is permitted听under SI 2006/614 for defined benefit schemes and so the arrears of her scheme pension will be taxable pension鈥� income.听

Example 4听

Kim has exercised her option to receive a lifetime annuity from an insurance company of her choice that does not underwrite the benefits in her pension scheme. There is an administrative delay within her scheme; payment of the consideration to the insurance company to purchase听the annuity is delayed, and her lifetime annuity cannot start on time. Until the purchase price is passed to the insurance company, there can be no certainty that the annuity will be secured at a given rate, so the rights remain听prospective, and actual entitlement is delayed until an insurance company does accept that payment of the consideration was made. Eventually an insurance company receives the payment for an immediate annuity and are then bound to pay out the annuity from whatever is the start date under the terms of the contract. The date on which payment was effectively made for the annuity becomes the date of 鈥榓ctual entitlement鈥�.听This is because although Kim completed all the steps that were required of听her to obtain the benefit, it was not until payment of the consideration was made to the insurance company that one could define what the entitlement was to. The fact that the annuity is paid monthly in arrears does not affect the actual entitlement date. If the insurance company paying Kim鈥檚 annuity had an internal administrative delay resulting in the late payment听of her annuity that would not have delayed her actual entitlement either. It is only the scheme delay that extended the final action听that Kim performed in choosing the insurance company that would make the annuity payments.听

Example 5听

On 3 May 2014, Wale designates听拢10,000 from his pension fund as being available for the payment of a drawdown pension. He has made similar designations in the past. It is another 2 years before Wale actually starts听to draw any pension from the designated funds. However听for the purposes of the tax rules he is considered to have become actually entitled听on 3 May 2014 to a drawdown pension from the 拢10,000 designated on that day.听

What is meant by 'becoming entitled' to a lump sum

Section 166(2) and paragraphs 1 to 3A and 4A Schedule 29听

Pension commencement lump sum听

For a pension commencement lump sum, the entitlement is normally deemed听to arise immediately听before the entitlement to the linked scheme pension/drawdown pension/lifetime annuity (see鈥�PTM062310). This date may well be different from the date that the lump sum was actually paid, as the lump sum can be paid up to 6 months before or 12 months after the entitlement to it arises.听

Where the lump sum is a scheme-specific protected pension commencement lump sum that is linked to a small pension right, and that pension right is in turn paid out as a trivial lump sum (as described at鈥�PTM063130), the entitlement to the scheme-specific protected pension commencement lump sum is deemed to arise immediately before the entitlement to the linked trivial lump sum arises.听

There are however special rules about the date of entitlement, which apply where a lump sum has been paid in anticipation of entitlement to any of the above kinds of pension arising within the following 6 months, but the member dies before that entitlement actually arises. In such circumstances, the payment may nonetheless be treated as a pension commencement lump sum and entitlement to the lump sum is deemed听to have arisen immediately听before the member鈥檚 death.听

Uncrystallised funds pension lump sum听

The member becomes entitled to the uncrystallised funds pension lump sum immediately听before it is paid.鈥�听

Other types of lump sum听

With any other type of authorised lump sum, the member only becomes 鈥榚ntitled鈥� to it听at the point when they first obtain an 鈥榓ctual right鈥� to receive it. This 鈥榓ctual right鈥� has to听be distinguished from their 鈥榩rospective right鈥�.听An 鈥榓ctual right鈥� is when a member has the right to a lump sum without having to fulfil any further conditions or take any further actions, for example:听