When are beneficiaries' annuities from drawdown funds tax-free under section 646C?

Annuities paid to dependants, nominees, or successors from drawdown pension funds are tax-free where the member or previous beneficiary died on or after 3 December 2014 and before reaching age 75. The annuity must be purchased from a qualifying drawdown fund under a money purchase arrangement in a registered pension scheme.

What is the two-year designation rule under section 646C ITEPA 2003?

If uncrystallised funds are designated into a dependant's or nominee's flexi-access drawdown fund on or after 6 April 2015, the designation must occur within two years. The period runs from when the scheme administrator first knew, or could reasonably have been expected to know, of the member's death.

How do pre-6 April 2015 payments affect the tax exemption for beneficiaries' annuities?

The tax exemption is lost if any payments were made before 6 April 2015 from the drawdown fund used to purchase the annuity. This includes income withdrawal payments, earlier annuity payments from the same fund, or payments from a predecessor fund. All subsequent payments become taxable as pension income.

Can converting an old drawdown fund into a flexi-access drawdown fund preserve the section 646C exemption?

No. If a dependant's drawdown pension fund from which payments were already made before 6 April 2015 is re-designated into a flexi-access drawdown fund, the exemption does not apply. The restriction cannot be circumvented by converting an old fund into a new flexi-access fund.

Income Tax (Earnings and Pensions) Act 2003 section 646C

Registered schemes: beneficiaries' annuities from drawdown funds

Section 646C sets out when annuities and short-term annuities paid to beneficiaries from drawdown pension funds can be received free of income tax.

Annuities paid to dependants or nominees from drawdown funds are tax-free where the pension scheme member died on or after 3 December 2014 and before reaching age 75.
Annuities paid to successors from flexi-access drawdown funds are tax-free where the previous beneficiary died on or after 3 December 2014 and before reaching age 75.
The tax exemption is lost if any payments were made from the relevant drawdown fund before 6 April 2015, including income withdrawal payments or earlier annuity payments from the same or a predecessor fund.
The tax exemption is also lost if the annuity was purchased using uncrystallised funds that were not designated into the drawdown fund within two years of the scheme administrator knowing, or reasonably being expected to know, of the member's death.

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