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 The funds can usually be withdrawn tax free if the original investor dies before the age of 75, or subject to income tax if death occurs after 75.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. Pension contributions made while in ill health or within two years of death 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
Please note drawdown is a more complex option than an annuity and if you make the wrong decisions you could run out of money. What you do with your pension is an important decision. Therefore, we strongly recommend you understand your options and check they are suitable for your circumstances: take appropriate advice or guidance if you are unsure. Our service is not personal advice. We offer a range of information to help and independent financial advice if requested. Alternatively, Pension Wise, the Government's new pension guidance service, provides a free impartial service to help you understand your options at retirement. It's available at www.pensionwise.gov.uk, by calling 030 0330 1001, or face to face.
Client case study: New found freedom with drawdown
David Simpkins from Essex explains how he is making the most of this new found freedom and why drawdown was the best option for him.
Client case study:
Mr Simpkins, Essex
Now that I am retired I have much more time to do the things I want to do. I garden quite a bit. We also get to travel more, managing to go abroad three or four times a year. We have relatives in South Africa and Australia which are long hauls so we go for at least two weeks at a time. We also visit friends and family in Scotland and Ireland quite regularly.
I am retired but I still do some part time work as a pharmacist. This supplements the income from my pension rather than the other way round. The main part of my pension is in the Vantage SIPP as drawdown and I draw a regular income from this. I also have an annuity which I took out from the protected rights section of my pension a few years ago. This was before the changes in regulation I believe and I couldn’t take it as drawdown at that time. Since then the rules have changed but I wanted to get my hands on the money as soon as possible.
I chose drawdown because I want to keep the option open for passing the fund on to my daughters in the event of my death. I did plan my retirement when I was still working full time, it wasn’t a snap decision. Because of this the pension income I have is more or less what I was expecting in retirement and I am happy with the income I have from my drawdown.
Would I have done anything different? I would have transferred to a SIPP a long time ago had I realised the advantages. My pension was previously with one of the insurance companies. They were awful. They gave me a choice of funds, but they were their funds, basically there wasn’t much choice and the returns were abysmal.
When I converted my SIPP to drawdown I chose to keep the SIPP open in case I wanted to contribute more into it. I have put more in since I started the drawdown and I will still put small amounts in from time to time. It’s an advantage to put the £2,880 in each year and get the government to add the tax relief. I will then hopefully retire fully in a couple of years and move the rest into drawdown.
With interest rates so low it is hard to know what to do with the cash in my SIPP at the moment. I am a reasonably active investor so don’t want to tie all my money up in fixed high interest accounts but the interest on cash deposit is so low at the moment. The markets have had a jolly good run recently and one way or another it cannot continue. If we get another slump in the market my view is to buy then and off we go again.