Beneficiary drawdown

When an individual dies, the scheme administrator or scheme trustees will normally decide who the beneficiaries should be. This will usually be at the scheme administrator/trustees’ discretion but could be at the individual’s direction. Our article Death benefits: discretion or direction? explains the difference.

Once the beneficiaries have been identified, they’ll be asked which death benefit option they want to take and assuming beneficiary drawdown is a feature of the plan and is chosen, who they want their beneficiaries to be.

Like any drawdown plan, a beneficiary drawdown plan can be transferred to another provider. However, the beneficiary would have to be in beneficiary drawdown with the ceding scheme. If the individual’s scheme doesn’t offer beneficiary drawdown, it’s too late – the beneficiary can’t ‘transfer’ the death benefit to access beneficiary drawdown with another scheme.

When someone in beneficiary drawdown plan dies, their beneficiaries can also be offered the option of taking the death benefit as a beneficiary drawdown. In this way, it’s possible for death benefits to be passed down the generations but of course normally the beneficiary will make withdrawals from the plan which will reduce the amount in the beneficiary drawdown plan. HMRC call the initial beneficiary drawdown plan a nominees’ beneficiary drawdown and later ones a successors’ beneficiary drawdown.

How beneficiary drawdown works, an example 

Laura’s personal pension plan offers beneficiary drawdown. On her death at age 69, her only child Ian is asked if he wants the death benefits as a lump sum or as nominees’ beneficiary drawdown. He opts for drawdown and names his son Andrew and daughter Carol as beneficiaries with 50% allocation each. As Laura died before age 75, Ian won’t pay income tax on withdrawals from his nominees’ drawdown plan.

On Ian’s death at age 80, Andrew opts for a lump sum death benefit payment and Carol opts for a successors’ beneficiary drawdown, with her daughter Louise as beneficiary. As Ian died after age 75, Andrew will pay income tax on the lump sum and Carol will pay income tax on any withdrawals she makes.

The same choice will be given to Louise on Carol’s death (assuming there’s anything left of course!) and so it can go on.

Death, drawdown and the lifetime allowance 

If the death of the original plan holder is before age 75, this is a benefit crystallisation event and the funds are tested against their lifetime allowance. There are no further benefit crystallisation events, on the death of any beneficiary, the remaining benefits are not tested against the lifetime allowance again.

The scheme administrator will pay out the death benefits in full – they won’t deduct any lifetime allowance charge.

The personal representative of the individual calculates if there is an excess over the lifetime allowance and tells HMRC if there is.

HMRC then tells the beneficiaries of the charge payable on the death benefits they received and they’re responsible for paying the charge.

HMRC Pensions Tax Manual - PTM087000: Liability for the lifetime allowance charge when the member has died

Transferring a drawdown plan

If the individual has a beneficiary drawdown plan it is possible to transfer that beneficiary drawdown plan to another provider. However, it must be a beneficiary drawdown to beneficiary drawdown transfer.

What can’t be done is for the beneficiary to ‘transfer’ the death benefit rights to another provider to get beneficiary drawdown where that’s not an option under the deceased individual’s scheme.

Beneficiaries resident overseas

Following Brexit, people resident outside of the UK can’t usually take out a new UK plan or change existing ones. A beneficiary who is resident overseas can’t choose to have benefits paid as beneficiary drawdown or survivor’s annuity.

Most providers (Royal London included) don’t allow beneficiaries resident in any overseas country to opt for beneficiary drawdown, as they do not have permission to market their products in the relevant country. It is essential to confirm the product providers permissions if your client is not UK resident.

Q: Do you need to be aged 55 (or age 57 from 2028) or over to access beneficiary drawdown?

A: Beneficiary drawdown works in a similar way to flexi-access drawdown for an individual but without the age restrictions in relation to access. Someone of any age can receive a beneficiary drawdown.

Q: If someone was receiving a tax-free income from a beneficiary drawdown plan as the original individual died under age75, will any subsequent beneficiaries receive their income tax free?

A: Not necessarily.

The tax treatment of a beneficiary's drawdown payments starting on or after 6 April 2015 largely depends on the age of the deceased individual at death:

• Death before age 75 - the payments can normally be paid tax free.
• Death on or after age 75 - any drawdown payments are taxable at the recipient’s marginal rate of income tax. 

The taxation depends on the age at death of the last owner of the fund, so withdrawals from an inherited fund can be taxed differently as the plan passes to new beneficiaries on successive deaths.