Beneficiary drawdown can preserve valuable flexibility after death, but its availability depends on the rules of the existing scheme, the status of the beneficiary and, critically, the member’s nomination. Mark Plewes – Head of Pensions Technical at WBR Group, looks into some of the detail.
More than a decade after pension freedoms, beneficiary drawdown is still sometimes assumed to be a standard feature of defined contribution pensions.
Tax legislation permits money purchase arrangements to provide flexi-access drawdown for dependants, nominees and successors, allowing no income, regular or ad-hoc withdrawals, or the whole fund to be taken in a single payment.
Where scheme rules do not permit this, the Finance Act 2004 contains a statutory override allowing such payments to be made. However, the override is permissive rather than mandatory, so trustees and managers are not legally obliged to offer beneficiary drawdown.
If the deceased’s scheme cannot establish beneficiary drawdown, the beneficiary cannot simply transfer the death benefit entitlement to a provider that can.
The original scheme must first designate the funds to beneficiary drawdown and only an established beneficiary drawdown fund can subsequently be transferred on the appropriate basis. In the absence of a drawdown option, the practical options may be limited to a lump sum or, where offered, a beneficiary annuity.
It is therefore insufficient to ask whether a plan “offers drawdown”. Member drawdown and beneficiary drawdown are separate capabilities and understanding the benefits available after a member’s death is as important as discussing who death benefits should ultimately pass to.
Written confirmation of the death benefits available on a member’s death, the categories of beneficiary supported and whether dependant’s, nominee’s and successor’s drawdown are all available should be part of any planning conversation.
This goes hand in hand with the importance of a member’s nomination or expression of wishes. An expression of wishes tells trustees or the scheme manager who the member would like to benefit and in what proportions.
In a discretionary arrangement, it is likely to be one of a number of factors in any decision rather than being legally binding and ultimately the decision-maker will consider it alongside other circumstances and relevant factors at death.
Importantly, naming a non-dependant is likely to mean that person can be treated as a “nominee” who is legally capable of receiving nominee’s drawdown.
In the absence of a valid nomination an adult child, friend or other non-dependant should not be assumed to have an income option merely because trustees could select them to receive a lump sum.
This restriction matters. A scheme administrator can nominate someone only where there is no surviving dependant and no valid member nomination.
Consider a separated but not divorced client whose spouse remains a dependant and who has made no valid nomination. Even if the trustees select the adult children, they may only be offered lump sums because they cannot be treated as nominees.
A nomination cannot guarantee the ultimate beneficiary in a discretionary scheme, but it gives non-dependants the best chance of drawdown eligibility.
An up-to-date expression of wishes is therefore essential. Marriage, divorce, bereavement, births and changing family relationships are obvious review triggers. An unclear or outdated nomination can increase uncertainty just when trustees are collecting evidence about family relationships and financial dependency.
Ultimately, beneficiary drawdown keeps assets within a pension environment that benefits from various tax exemptions, allows withdrawals to be aligned with the beneficiary’s needs and tax position, and can permit any unused balance to pass to a successor on the death of the initial beneficiary.
Designation into beneficiary drawdown is also not tested against the deceased member’s lump sum and death benefit allowance (LSDBA).
By contrast, where death occurs before age 75, relevant tax-free lump sum death benefits are usually tested against the available LSDBA, with any excess taxable at the recipient’s marginal rate.
The absence of beneficiary drawdown can therefore be costly as well as restrictive.
Where a lump sum is chosen or is the only option, the beneficiary loses the ability to phase withdrawals within the pension or leave the balance for successor drawdown.
Drawdown is not automatically preferable and investment risk, charges, the beneficiary’s objectives and any immediate need for capital must still be considered.
For deaths on or after 6 April 2027, the value of most unused pension funds and pension death benefits will be brought into the deceased’s estate for IHT purposes, making the conversation more complex.
Existing exemptions, including qualifying transfers to spouses, civil partners and charities remain, and some specified benefits, including death-in-service benefits, are excluded. Against that backdrop giving beneficiaries the widest practical choice is likely to be important.
Where IHT is charged on an unused pension and death benefits are also subject to income tax on a death after age 75, drawdown may still help manage the timing of income tax, preserve withdrawal flexibility and support successor planning.
In that context nominations arguably become more important. The recipient’s identity may affect whether an IHT exemption applies, while nomination status may determine whether a non-dependant can access drawdown at all.
The central lesson is simple: beneficiary drawdown should never be assumed. Establishing availability and maintaining a current nomination gives future beneficiaries the greatest choice.
A nomination cannot guarantee the outcome in a discretionary scheme, but without one otherwise sound intergenerational planning may fail at its first technical hurdle.
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