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Question asked by George Topping
I was wondering if the rules for flexi-access drawdown pensions define who can inherit your pension after you die? I’m not married, but most of the pensions I’ve seen focus on providing a widow’s pension and obviously this isn’t relevant to me! I’d like to leave my pension fund to my niece — does income drawdown allow this?
Many people are attracted to pension drawdown because it offers a far more flexible way to take your pension – including when it comes to who can inherit your pension after you die.
An alternative way of accessing your money purchase pensions is via an annuity, but there are restrictions on who can inherit these and you need to set out your wishes when you hand over your pension pot to buy the annuity.
The main ways you can ensure an annuity continues paying a dependent (usually a spouse or children up to age 23) after your death is to buy a joint life annuity or an annuity with a guarantee period. However, the younger the second life on the joint life annuity the lower the initial income you can expect to receive.
You’re much less restricted when it comes to who can inherit a drawdown pension and the way it can be paid.
You want to leave your pension to your niece, which is perfectly possible under drawdown. Pensions are usually free from inheritance tax. Providing your funds stay inside a pension or drawdown fund (i.e. not withdrawn and sitting in a bank account), they will sit outside of your estate when it’s valued to test your inheritance tax liability.
How an inherited drawdown pension is taxed depends largely on how old you are when you die. If you die before the age of 75, your niece can inherit your pension free from income tax providing she starts accessing the funds within two years of your death.
She doesn’t have to wait until she’s 55 to access the inherited pension pot and can take it as one lump sum, continue with drawdown or buy an annuity all without having to pay income tax.
If you die after the age of 75, however, your niece will have to pay income tax on anything she withdraws from your pension pot if she earns more than the income tax personal allowance in the year she makes the withdrawal.