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Flexi-Pension drawdown was introduced as a retirement option in April 2015. We have talked about the potential advantages of drawdown (and risks) elsewhere on this blog. One potential benefit will not actually help you at all (because - to be blunt - you will be dead) but it will help your loved ones
In this post, we cover what happens to any remaining drawdown pension fund after your death. To ensure your wishes are acted upon while causing the minimum stress to family members it is important to understand the drawdown rules and death benefits.
Regardless of what pension arrangements you may have it is important that you have a Will in place. Beneficiaries should know where the Will is (It may be at your Solicitors) and the names of your executors. Even when a Will is in place sorting the financial affairs of a deceased loved one can be a time consuming and stressful exercise.
You should make sure the drawdown pension provider is supplied with details of beneficiaries and their contact details. Your beneficiaries should also be made aware of their responsibility to inform the drawdown pension provider of your death in good time.
Ideally, beneficiaries should take their own professional financial advice but informing them of the potential ways forward, and the pros and cons of each can minimise the possibility of financial mistakes that may have long-term implications. Pension funds with a value at or approaching the lifetime allowance limit will require careful consideration.
Should you die before age 75 whilst in drawdown then beneficiaries may take the remaining pension (either in part or in full) as a lump sum, tax-free. They may leave all (or part) of the pension invested and take an income, again tax-free. Finally, they may use part (or all) of the pension drawdown fund to purchase a lifetime annuity. Income from this annuity will be tax-free.
If you die after age 75 whilst in drawdown the options are as stated above but with one major difference – the tax implications. If your beneficiaries either:
the income will be taxed at the beneficiary’s marginal tax rate (20%, 40% or 45% depending on their earnings).
If the remaining drawdown pension fund is converted to an annuity any income from that policy will also be taxed at the beneficiary’s marginal rate.
Usually, any pension is held outside of an estate and is therefore not subject to Inheritance Tax. However, it is prudent for anyone in drawdown to have cash (in bank accounts or ISA’s) to deliver some flexibility and ensure it is possible to ride out any market volatility without accessing the drawdown fund. This cash will be added to the estate and will be subject to tax if the total estate exceeds the inheritance tax limit.
There are other potential tax pitfalls to consider but tax law is complex and subject to change so it is always wise to take professional advice when there is any doubt.
What happens after your death may not be the most pleasant subject but it is important to be prepared. If you have any questions please get in touch and we will try to help. Use the Chat facility or call us on 0800 043 8341 for an immediate answer or request a call back by completing the form below.
This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. The past is not a guide to future performance. The value of investments can go down as well as up and you may not get back the full amount you invested. Tax and financial regulations can change. Any figures quoted above are correct at the date of publication.
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