Income drawdown death benefits
The death benefits under income drawdown are generally more favourable than under an annuity. This is a common reason why people enter into income drawdown. Sweeping changes to the tax rules come into effect from April 2015 to improve the tax treatment of pensions after the member's death. We outline the options below.
The existing options
In the event of your death whilst you are in income drawdown your beneficiaries will have the following options:
- Taking a lump sum
Any beneficiary can inherit some or all of your remaining fund as a lump sum. If it is paid before 6 April 2015 this is subject to a 55% tax charge (note this charge is not inheritance tax, pensions are usually held in trust outside your estate and therefore inheritance tax isn't usually applicable).
- Continuing with income drawdown
Your spouse or any other dependant can continue to receive your fund as income drawdown, or flexible drawdown (if they already have secure pension income of £12,000). The pension pot is not usually subject to inheritance tax, but if any income is taken before 6 April 2015 then all withdrawals will be taxed as the beneficiary’s income.
- Converting your drawdown fund to an annuity
Your spouse or any other dependant can use your remaining income 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 as the beneficiary’s income.
The new options after April 2015
The new position for funds already in income drawdown depends on whether you die before or after age 75. The changes take effect for death benefits paid from 6 April 2015, even if death occurs before this date.
The new rules allow pension wealth to be inherited by any nominated beneficiary (or beneficiaries). The funds can be withdrawn tax free if the original investor dies before the age of 75, or subject to income tax if death occurs after 75.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.
Death prior to age 75
- NEW OPTION: Taking the pension as a lump sum, tax-free
The 55% tax charge will be scrapped. 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.
- NEW OPTION: Continuing with income drawdown, with income paid tax free
Any beneficiary can continue to receive your fund as income drawdown. They will not be taxed on this income.
- NEW OPTION: Converting your drawdown fund to a lifetime annuity, with income paid tax free
Your spouse or any other dependant can use your remaining income drawdown fund to purchase a lifetime annuity. The pension pot is not usually subject to inheritance tax, and the income is tax free.
Death on or after age 75
- NEW OPTION: Taking the pension as a lump sum
The 55% tax charge will be scrapped. Any beneficiary can inherit some or all of your remaining fund as a lump sum. They can keep it within a pension, and pay income tax at their highest marginal rate (i.e. up to 45%) on the income they choose to withdraw, whether this is paid as a one-off lump sum or as a number of payments.
- Continuing with income drawdown
Any beneficiary can continue to receive your fund as income drawdown. The pension pot is not usually subject to inheritance tax, but any income taken would be taxed at the beneficiary’s marginal rate.
- Converting your drawdown fund to an annuity
Your spouse or any other dependant can use your remaining income 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.
Income drawdown in the Vantage SIPP is offered without advice as standard. Income drawdown is a complex option, and if you are at all uncertain about its suitability for your circumstances, we strongly recommend that you seek 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.
This information is based on our current understanding (18 February 2015) of pension rules applicable now and due to take effect from 6 April 2015 and is subject to change. Taxes can change and their value will depend on your personal circumstances.
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 income drawdown is a more complex option, if you are at all uncertain about its suitability for your circumstances we strongly suggest you seek advice. Your income is not secure. You control and must review where your pension is invested, and how much income you draw. Poor investment performance and excessive income withdrawals can deplete the fund leaving you short of income. From April 2015, new rules and restrictions on future pension contributions apply to investors in income drawdown: you should check how this affects you before making any decisions.
Client case study: New found freedom with income drawdown
David Simpkins from Essex explains how he is making the most of this new found freedom and why income 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 income 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.