What happens when I die?
The death benefits under drawdown are generally more favourable than under an annuity. New rules allow an investor's pension to be inherited by any nominated beneficiary (or beneficiaries). The funds can usually be withdrawn tax free if the original investor dies before the age of 75, or subject to income tax if death occurs after 75.
Individuals in the Vantage SIPP can nominate a beneficiary or beneficiaries to pass their pension to if they die - the nomination can be changed at any time.
In the event of your death whilst you are in drawdown your beneficiaries will have the following options under the current rules:
Death before age 75
- Taking the pension as a lump sum, tax-free
Any beneficiary can inherit some or all of your remaining fund, tax free. They can do what they like with it. This is a major change.
- Continuing with drawdown, with income paid tax free
A dependant or nominated beneficiary can continue to receive your fund as drawdown. They will not be taxed on this income.
- Converting your drawdown fund to a lifetime annuity, with income paid tax free
Your spouse or any other dependant can use your remaining drawdown fund to purchase a lifetime annuity. The pension pot is not usually subject to inheritance tax, and the income is tax free.
Death at or after age 75
- Taking the pension as a lump sum
Any beneficiary can inherit some or all of your remaining fund as a lump sum. The payment will be taxed at 45% (as income at the beneficiary's marginal rate from 6 April 2016).
- Continuing with drawdown
A dependant or nominated beneficiary can continue to receive your fund as drawdown, income from which will be taxed at the beneficiary's marginal rate
- Converting your drawdown fund to a lifetime annuity
A dependant or nominated beneficiary can use your remaining drawdown fund to purchase an annuity. The pension pot is not usually subject to inheritance tax, but any income taken from this annuity would be taxed at the beneficiary's marginal rate.
Pensions are typically held in trust outside your estate and so continue to be free of inheritance tax (IHT) in most cases. HMRC require tax-free benefits to be set up within two years of death. If you make a pension contribution, move funds into drawdown or reduce the income you are drawing from your drawdown plan while in ill health or within two years of death the funds may still be liable to IHT. Tax charges may also apply if you exceed the lifetime allowance and die before age 75.
This information is based on our current understanding (6 April 2015) of pension rules and is subject to change. Tax rules & benefits can change and their value will depend on your personal circumstances.
Drawdown in the Vantage SIPP is offered without advice as standard. Drawdown is a more complex option than an annuity, and if you are at all uncertain about its suitability for your circumstances, we strongly recommend that you seek personal financial advice.
Our advisory team would be happy to help you, for more information about their services please contact them on 0117 317 1690 or visit the advisory services section of our website.
A dependant can be
- a spouse/civil partner
- a child under 23 (or over 23 if they are dependant on the member through physical or mental impairment)
- someone financially dependant on the member, i.e. their relationship with the member is one of mutual dependence
Drawdown is a more complex option than an annuity. What you do with your pension is an important decision: you could run out of money. Make sure you understand your options and check they are suitable for your circumstances: take appropriate advice or guidance if you're unsure. Our service is not personal advice but we can offer advice if you specifically request this. The Government's free Pension Wise service can also help - more on Pension Wise.
Client case study: New found freedom with drawdown
James Carleton from Surrey explains why death benefits in drawdown are important to him and how this affected his retirement choice.
Client case study: Mr Carleton, Surrey
The new rules have really helped my plans to look after my children, Mark and Louise, and grandchildren, James, Sam, Olive and Jack. I aim to increase the value of my SIPP in order to pass this on to them. The new rules mean more money will go to my family and less will go to the Exchequer.
I will shortly be moving my SIPP into income drawdown to access my tax-free cash. Under the old rules this would have meant my pension would be subject to a 55% tax charge when I die. Now it will be tax free if I die before age 75. And if I die after age 75 my pension can be distributed to my beneficiaries tax free - they’ll just pay income tax if they take money out.