Death Benefits
When a member or survivor dies in drawdown there are three options available to their nominated beneficiaries in respect of the funds that are within the drawdown contract:
- nominate the funds to a survivor’s flexi-access drawdown;
- take the funds as a lump-sum death benefit; or
- purchase a survivor’s annuity
The rules apply:
- where the member or survivor dies in drawdown on or after 6 April 2015; and
- where death in drawdown occurred before 6 April 2015 but the death benefits are distributed on or after 6 April 2015.
Undrawn funds are funds that remain in drawdown when the previous holder dies.
There are no limits as to how many times a drawdown fund can be passed on with the survivor having the same options as the member with the tax treatment depending on what age the member was on death.
EG – As Gordon had already reached his 75th birthday when he died, the income Laura and George receive from their flexi-access drawdown funds is taxed as their pension income via PAYE.
In October 2019 Laura dies aged 70. She has nominated George to receive her dependant’s flexi-access drawdown fund. George designates these funds to a successor’s flexi-access drawdown fund in December 2019.
As Laura was aged under 75 when she died, the income George receives from his successor’s flexi-access drawdown fund is paid free of income tax.
Question - Use Your Note Taker To Jot Down Ideas / Calculations
Richard had a capped drawdown pension fund of £680,000 when he died in June 2018 aged 70. He nominated his son Adam, aged 30, to receive these funds.
Adam designates all the funds into a nominee’s flexi-access drawdown fund in August 2018 and in March 2019 takes a withdrawal from the fund of £30,000.
a) Which of the following statements correctly describes the tax treatment of this payment?
b) The income withdrawal of £30,000 is tax free but the MPAA rules are triggered.
c) The income withdrawal of £30,000 is tax free and the MPAA rules are not triggered.
d) The income withdrawal of £30,000 is taxable as Adam’s pension income via PAYE and the MPAA rules are triggered.
e) The income withdrawal of £30,000 is taxable as Adam’s pension income via PAYE but the MPAA rules are not triggered.
B)
The income taken from the nominee’s flexi-access drawdown is tax free because Richard died before his 75th birthday. It does not trigger the MPAA because the payment is taken from a survivor’s flexi-access drawdown and only a payment taken from a member’s flexi-access drawdown triggers the MPAA.