This question is one of the most common surrounding pensions, but thankfully we can help you out. The answer isn’t simple though and depends on a couple of factors including: how old you are when you die and the choices you make for your pension. The rules that govern this situation have changed recently so even if you had some idea you may want to give yourself a quick update to keep yourself prepared on the matter.
Our two part series on this will cover all of the new rules applied that apply to a few different situations.
The first part in the series will concern the rules that apply in the case that you die before taking any money out, or you are receiving your pension through income drawdown. The new rules governing pensions, in place from April 2015, mean that there is a way for you to pass on your pension tax free.
If You Die Before Age 75
Under the new rules, if you die before you turn 75 then the process is quite a simple one. Your beneficiaries will be able to receive your whole pension as a lump sum, or draw an income from it without it being subject to any tax through income drawdown.
There are also some separate rules for dependents that do not concern all beneficiaries. If a person is a dependent to you, they will be able to buy an annuity, although this will be subject to an income tax.
If You Die After Turning 75
The rules are a little different for those aged 75 and over, with your beneficiaries having three options on what to do with your pension.
The first option is that they take the whole pension fund out in one lump sum. Currently, this means that the pension will be subject to a 45% tax, but proposed rules for the future that may come in during 2016/2017 state that the pension should only be subject to the income tax rate of the beneficiary.
The second option is to take the pension out in lump sums, but periodically. Rather than having to pay the 45% tax like in the first option, the lump sums will be treated as income and only taxed at the income rate of the beneficiary.
The third option concerns dependants only and not all beneficiaries. Dependants will be able to take the pension out through income drawdown, which is only subject to the income tax of the dependant.
In the second part of this series we will cover the rules governing situations in which you are receiving an annuity income from your pension.
Hopefully you are now more informed about your pension, but if you feel like you still need some help along the way then this is completely fine. Here at Burton & Fisher, we are financial advisors in Lancaster who can help you with a whole range of financial issues. If you would like some advice, or information about what we can provide, don’t hesitate to contact us on 01524 416 872.