Income drawdown death benefits
What happens to your pension if you die in income drawdown?
Unlike annuities, if you die in retirement while taking income drawdown the remainder of your pension fund can be passed on to your beneficiaries. The 55% ‘pension death tax’ was abolished in the 2015 pension changes, and any taxation will now depend on your age at death. If you die before the age of 75 you can pass on your pension as a tax-free lump sum or income (through drawdown or an annuity), but if you die after your 75th birthday the lump sum or income is taxable.
How much tax is there to pay?
If you die after your 75th birthday your pension will be subject to tax when it is passed on, regardless of whether or not you have made withdrawals or how your beneficiaries choose to access the money. Both lump sum withdrawals and regular income (taken through income drawdown or an annuity) will be taxed at your beneficiary’s marginal rate of Income Tax.
How are annuities different?
The death benefits of your pension are different if you buy an annuity in retirement instead of taking flexi-access drawdown (the new name for flexible drawdown).
Annuities do not usually pay any income to your beneficiaries after your death.
However, in some cases this may be different – if you apply for a joint life annuity or opt for either a minimum guarantee period or value protection. You can find out more about these options by using our online annuity calculator or contacting us on 020 7189 2400.
The differences between income drawdown and annuities
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The decision to access your pension is an important one and will affect your income and possibly your standard of living for years to come. Therefore we recommend that before any decision is made you receive regulated financial advice or get free guidance from Pension Wise. Find out more about Pension Wise.