Under current law, if an individual has accessed his pension through drawdown, rather than by purchasing an annuity, on his death the remaining fund may be passed to a beneficiary, subject to tax:
- at 55% if the funds are paid as a lump sum or
- at the recipient’s marginal rate of income tax if the funds are placed in drawdown to provide an income to the beneficiary.
If the individual has not taken any benefits at all at the date of his death the funds may be passed, tax-free, to a dependant.
Changes from April 2015
In October the Government announced that, with effect from 6 April 2015, funds in drawdown may be passed to a named beneficiary (not necessarily a dependant) on the member’s death and that, where the member was younger than 75 at his date of death, all payments to the beneficiary will be tax-free.
Where the member is over 75 at his date of death tax will be due:
- at an “emergency” rate of 45% if the funds are paid as a lump sum or
- at the recipient’s marginal rate of income tax if the funds are placed in drawdown to provide an income to the beneficiary.
With effect from April 2016 the 45% rate will be replaced by the recipient’s marginal rate of income tax.
These rules will apply to all payments made after 5 April 2015, even if the member die before that date, although the lump sum must be paid, or drawdown commenced, within two years of scheme being notified of the member’s death.
In the Autumn Statement, delivered on 3 December, the Chancellor announced that these new rules will apply also on the deaths of annuitants. From 6 April 2015, where an annuitant with a joint-life or guaranteed annuity dies while under 75, his beneficiaries will be able to receive future payments from the annuity tax-free.
There will, however, be an overriding limit in all cases that, if the member’s benefits have not been tested previously against the lifetime allowance (LTA), any benefits in excess of the LTA will be subject to an LTA charge.
Comment
Strangely, this creates an anomaly between defined benefit and defined contribution arrangements, since dependants’ pensions payable from a defined benefit scheme on the death of a member under 75 will continue to be subject to income tax at the dependant’s marginal rate.