Since April 2015, ‘Money Purchase’ pensions such as personal pensions and SIPPs (self-invested personal pensions) can now be passed on down the generations and on to any named beneficiary, regardless of whether they are a relative or not. While there has been much in the news regarding the new pension benefits, there is little advice available on what to do if you are the beneficiary of a pension.

Are you the beneficiary of a pension but unsure what to do? 

• If a pension holder dies before age 75, the beneficiary can receive the pension as a lump sum, annuity or a new ‘Flexi Access Drawdown’ fund. There will be no tax to pay on the money received (as long as it is less than the lifetime allowance, which is currently £1.25m). This can apply whether or not money has been withdrawn from the pension.

• If the pension holder dies over age 75, the benefits are taxed at the beneficiary’s marginal rate of income tax. So, for example, if they are a basic rate income taxpayer they will pay 20% on any withdrawals (under 2015-2016 tax rules). The exception to this is if the beneficiary takes a lump sum out of the pension, which will be taxed at 45%, but only up to April 2016.

There will be no inheritance tax to pay, but given that the average life expectancy at age 65 in the UK is 86.6 years for men and 89.3 for women, it is clear that the government is expecting that most individuals will have to pay some income tax.

What should the beneficiary of a new Flexi Access Drawdown pension consider?

It is important to understand there are a few caveats when it comes to the new pension changes.

• If the pension holder dies before they are 75, the money can be passed on tax free, can be taken either as a lump sum or as income via an annuity or flexible drawdown.
• If the policyholder is to die on or after their 75th birthday, your tax status and personal circumstances will be considered when ascertaining whether it will be better to secure a guaranteed regular income via an annuity or the more flexible drawdown arrangement, paying income tax on the amounts withdrawn, or as a lump sum (45% tax prior to April 2016).

Flexi Access Drawdown schemes keep the money invested and will need managing. Look at the risk you want to take with the money and accordingly, take advice about which may be the most suitable investments.

If you have beneficiaries you want to pass the pension on to, ensure you have completed your own expression of wish form for your new Flexi Access Drawdown fund.