Before the changes to pension rules in April 2015, only a dependant of the pension plan holder could receive a drawdown pension on the plan holder’s death.
Since April 2015 however, a nominee(s) can also now receive a drawdown pension called Nominee Flexi-Access Drawdown. What’s more, on the nominee’s death, a successor(s) can take a drawdown pension called Successor Flexi-Access Drawdown.
The problem is, that many existing pension plans are not able to offer Nominee and Successor Flexi-Access Drawdown, which means that on the pension policy holder’s death, the pension fund value is paid out to the nominees as a cash lump sum and treated as part of their estate. This creates two potentially avoidable issues:
- Whilst held as cash the money is not in a tax-advantaged environment which means if the nominee or successor wants to invest the money, tax might have to be paid on income or growth or both.
- On the nominee’s death, the amount could be subject to Inheritance Tax (IHT) when passed onto their beneficiaries.
The benefits of Nominee and Successor Flexi-Access Drawdown
- You can pass wealth down through family generations in a pension wrapper and they won’t be subject to IHT. Otherwise known as the ‘family pension tree’.
- The monies will be retained in a tax-advantaged environment until they are needed by the nominee or successor. Or they can be passed down to the next generation on the nominee or successor’s death and they won’t be subject to IHT
- They provide a flexible income to the nominee or successor as and when they need it. What’s more, if the pension policy holder dies before they reached age 75, the income payments are made tax free.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen. There’s no guarantee that you’ll be any better off by transferring, and should consider any relevant benefits, guarantees and penalties. Remember that the value of your pension can go down as well as up and you may get back less than has been paid in.