How does beneficiary drawdown work?

Beneficiary drawdown allows a dependant, nominee or successor to receive pension death benefits through drawdown rather than entirely as a lump sum. The beneficiary can choose when and how much income to take, but this option is available only if the existing scheme is willing and able to provide it and the relevant conditions are met.

Who decides who gets the pension?

When an individual dies, the scheme administrator or scheme trustees will normally decide who the beneficiaries will be. This will usually be at the scheme administrator/trustees’ discretion but could be at the individual’s direction. Our articles Death benefits – Discretion how to nominate a beneficiary and Death benefits – Direction explain the differences between the two options.

What choices does the beneficiary have?

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

Can beneficiary drawdown be passed on?

Yes it can. When someone in a 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 refer to the first beneficiary drawdown as nominee’s drawdown, and any subsequent beneficiary drawdown arrangements as successor’s drawdown.

How is beneficiary drawdown taxed when it is inherited by subsequent beneficiaries?

The tax treatment of a beneficiary's drawdown payments starting on or after 6 April 2015 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.

Example

Let’s look at an example of when a child is looking to claim a deceased parent’s pension.

How is beneficiary drawdown tested against the lump sum and death benefit allowance?

Beneficiary drawdown isn’t tested against the lump sum and death benefit allowance (LSDBA) because the benefits are taken as pension income rather than as a lump sum.

This can be particularly important where an individual dies before age 75 with little or no LSDBA remaining. A relevant lump sum death benefit is tested against the deceased individual’s available LSDBA, with any excess taxable at the beneficiary’s marginal rate.

In contrast, beneficiary drawdown isn't tested against the LSDBA, and withdrawals remain income even if the beneficiary withdraws the whole fund. Where death occurs before age 75, beneficiary drawdown income can be tax-free provided the relevant conditions are met.

Can an individual transfer a beneficiary drawdown plan?

Yes. A beneficiary drawdown plan can be transferred to another provider, but it must be a beneficiary drawdown-to-beneficiary drawdown transfer. The beneficiary must already be in beneficiary drawdown with the existing provider.

If the deceased individual’s pension scheme doesn’t offer beneficiary drawdown, the death benefits can’t be transferred to another provider simply to access beneficiary drawdown.

Can an overseas resident have beneficiary drawdown?

Yes, an overseas resident can have beneficiary drawdown under UK pension tax rules, but whether it is available will depend on the pension provider’s rules. HMRC’s rules do not require the beneficiary to be UK resident. However, not all pension schemes offer beneficiary drawdown and providers may apply their own eligibility requirements.

Most providers won’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 provider's permissions if your client is not UK resident.

At what age can an individual access beneficiary drawdown?

There is no minimum or maximum age for accessing beneficiary drawdown. Unlike accessing their own pension savings, a beneficiary does not need to reach the normal minimum pension age before they can take withdrawals from a beneficiary drawdown plan. Subject to the pension scheme’s rules, a beneficiary with flexi-access drawdown can choose to take no income, regular or irregular withdrawals, or withdraw the whole fund.