HMRC gives green light to backdated annuity payments

HM Revenue & Customs has confirmed annuity providers can back date payments to the age at which an individual would have qualified to take their pension without the income being classified as an unauthorised payment.

In a pension schemes newsletter published on its website, the UK’s tax watchdog responds to queries from industry over lifetime annuity contracts under which a pension scheme provider agrees to backdate payments to a member from the date at which they became able to claim a pension under the scheme rules.

As a result of this back dating, payments will initially be higher and then decrease to a lower annual rate that is effectively being paid for a longer period.

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To qualify for tax treatment as a lifetime annuity, an annuity needs to meet a condition that ‘the amount of the annuity must not decrease’. This raised concern that the payments would be classified as unauthorised payments under HMRC rules.

HMRC states that after studying these backdated payments it has decided annuitants could receive this cash without having to change their tax status.

It says: “Where an amount of arrears in respect of a period before the contract was set up is paid at the time the annuity starts, we would not consider that the ‘amount of the annuity’ had decreased, if the amount paid in respect of the earlier period was paid at the same rate pro rata as the payments made going forward.

“For the avoidance of doubt, our guidance set out in the Registered Pension Schemes Manual... is not affected by this clarification.

“The entitlement to the lifetime annuity still arises when all the necessary steps have been taken. The entitlement to the pension commencement lump sum therefore still arises immediately before that time, and it can be paid up to six months before that date (or 12 months afterwards).”

HMRC says it is considering whether any changes need to be made to our guidance in RPSM in order to clarify the new interpretation.