Beneficiary drawdown

Beneficiary drawdown (this could be capped drawdown or flexi-access drawdown) is a death benefit option; the others being a lump sum or a survivor’ annuity. Not all plans offer the full range of death benefit options.
Key facts
  • Beneficiary drawdown is a death benefit option.
  • A beneficiary drawdown plan can be transferred to another provider
  • When someone in beneficiary drawdown plan dies, their beneficiaries can also be offered beneficiary drawdown.
  • If death is before age 75, this is a benefit crystallisation event against the deceased individual’s lifetime allowance.

When an individual dies, the scheme administrator or scheme trustees will 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 if there are any funds left on their death.

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.

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.

Beneficiary drawdown and the lifetime allowance 

If death is before age 75, this is a benefit crystallisation event against the deceased individual’s lifetime allowance; a beneficiary’s lifetime allowance is unaffected.

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.

If there is an excess over the lifetime allowance, it would be better, from a tax charge point of view, for the beneficiary to take the death benefits as a beneficiary drawdown rather than a lump sum as the tax charge will then be 25% rather than 55%. A lump sum can then be taken from the beneficiary drawdown plan at any point if required.

If death is after age 75, there’s no benefit crystallisation event as a final check against the lifetime allowance will have been made at age 75.

Transferring a drawdown plan

A beneficiary in a beneficiary drawdown plan can transfer that beneficiary drawdown plan to another provider. In other words, it needs to 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, individuals resident in the European Union can’t effect new UK plans or enhance existing ones. A beneficiary resident overseas can’t therefore opt for 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 would have to have permission to market their products in the relevant country.

Q: Do you need to be aged 55 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 age 75, will any subsequent beneficiaries receive their income tax free?

A: Not necessarily:

Where dependant's drawdown income payments started before 6 April 2015, it will continue to be subject to income tax.

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.

Further information

Note

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.