Income drawdown (also known as flexi-access drawdown), has become hugely popular for the death benefits it offers. It allows any unused savings to be passed onto an estate, often with favorable tax breaks. This means that pension funds can either be enjoyed by the owner, or their estate, rather than lost to an insurance company.

Previous rules around retirement benefits were geared towards providing for the owner or their financially dependent spouse/partner, but no one else. The Treasury allowed tax relief in pensions to provide support in retirement, not to enable assets to be passed on within an estate avoiding inheritance tax. Well, that’s the old rules, the new rules are much for favorable.

In any pension fund excluding a defined benefit scheme (which have their own rules), any pension monies that are left, if the pension owner dies before age 75, can be passed on to beneficiaries without any tax charge. This is irrespective of whether the pension is in payment or not. It can be passed onto anyone named in a ‘nomination of beneficiaries’* form (which should have been completed when the pension was set up), tax free.

If you are in drawdown, your beneficiaries can chose to take this fund as a lump sum or carry on withdrawing an income, there will be no tax to pay.

If you die after age 75 and leave pension assets, this will be taxed in the hands of the beneficiary. There won’t be a tax charge on transfer, it will be tax when the beneficiary wants to take an income. Any income taken from the fund by the beneficiary will be added to their own income during that tax year and taxed at their marginal rate.

The beneficiary can decided to either leave the funds within drawdown, potentially enjoying any growth, until they need to take an income, or withdraw them all out as a lump sum (but pay the tax).

The advantage of passing assets on within a pension fund is they are held in trust outside of your estate. This means they won’t be considered when calculating any inheritance tax liability.

So to summerise, death before age 75 no tax liability, death after age 75, tax only when taken out of the pension and taxed against beneficiaries income.

*If you’ve not completed a nomination of beneficiaries form, or your wishes have changed, contact your pension provider. It is vital this form is accurate and up to date to allow your wishes to be carried out.