Death benefits under flexi-access drawdown (FAD)
The new legislation has greatly improved the death benefits from drawdown pensions and indeed annuities. There is a key difference in how the death benefits are treated, and that depends on whether death occurs before or after age 75.
Death before age 75
In the event of death before age 75, the fund can be paid out completely tax free as cash, or as a drawdown pension, from which withdrawals would be treated as a tax-free income. The fund can be passed onto any beneficiary. Payment must be made within two years of death
Death after age 75
If death occurs after age 75, then the rules differ and tax could be payable.
If the fund is paid out in one go: For the tax year 2015/2016 this would incur a tax rate of 45%. From 2016/2017 it is taxed at the beneficiaries highest marginal rate.
If the fund is passed onto a beneficiary as a drawdown arrangement; in these instances any withdrawals are taxed under income tax rules, effectively the income is added to other taxable income.
Annuity death benefits have also been improved by the new legislation, in terms of tax efficiency. For more information see annuity death benefits for more details.
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