Current rules state that pension annuities lapse on the death of an individual, with no value passing to their children. In contrast, drawdown pensions can be passed on to the next generation, subject to a 55% charge on the fund. We were expecting an announcement of a reduction in this penal charge in the Autumn Statement, but the Chancellor decided to announce the change earlier than anticipated at the Conservative Party Conference. The changes will have exciting estate planning opportunities.
From next year, individuals with a drawdown arrangement or with uncrystallised pension funds will be able to nominate a beneficiary to receive their pension when they die.
No tax if pensioner dies before age 75
If an individual dies before they reach the age of 75, they will be able to give their remaining defined contribution pension to anyone as a lump sum. This lump sum is tax free, whether it is in a drawdown account or uncrystallised. This contrasts with ISAs and other investments, which would potentially be subject to inheritance tax.
Furthermore, the person receiving the pension pot will pay no tax on the money they withdraw from that fund, whether it is taken as a single lump sum or accessed through drawdown.
Death of pensioner after age 75
Anyone aged 75 or over dying with a drawdown arrangement or with uncrystallised pension funds will be able to nominate a beneficiary to pass their pension to. It is proposed that the nominated beneficiary will be able to access the pension funds flexibly, at any age, and pay tax at their marginal rate of income tax. There are no restrictions on the amount of the pension fund that the beneficiary can withdraw at any one time. Beneficiaries will also have the option of receiving the pension as a lump sum payment, subject to a tax charge of 45% (if the deceased is over 75).