Flexible retirement income is often referred to as pension drawdown, or flexi-access drawdown, and is a way of taking money out of your personal pension to live on in retirement. It can give you more flexibility over how and when you receive your pension. You can take up to 25% of your pension as a tax-free lump sum.
Flexi-access drawdown (FAD) replaced the capped and flexible drawdown options for individuals setting up a new drawdown plan after 5 April 2015. It also replaced any existing flexible drawdown plans at 6 April 2015.
Beneficiary flexi-access drawdown (BFAD) allows individuals to pass on pension benefits in a manner where the beneficiaries have immediate access to the funds after death, while retaining some of the main advantages of being within a pension arrangement. This includes tax-free growth and favourable Inheritance Tax treatment.
What this means is that you can leave your personal pension to your loved ones who can then step into your shoes and treat the pension as their own.
The rules for who can receive pension funds as a BFAD arrangement are quite complex though. Additionally, the option to “nominate” non-dependants means that expression of wish forms need to be regularly reviewed and updated where required.
Beneficiary flexi-access drawdown is also confusingly known as nominee and successor flexi-access drawdown.
So-called retirement freedom introduced in 2015 the concept of nominee and successor flexi-access drawdown.
What are nominee and successor flexi-access drawdown?
Only a dependant of the member could receive a drawdown pension on the member’s death before 6 April 2015. Now a nominee or nominees of the member can also receive a drawdown pension. This is called nominee flexi-access drawdown.
On the dependant’s or nominee’s death, a successor or successors can then take a drawdown pension. This is called successor flexi-access drawdown.
Who is a nominee and a successor?
A nominee is an individual nominated by the member or the scheme administrator who is not a dependant. The scheme administrator can only nominate an individual where there is no surviving dependant, individual or charity nominated by the member.
A successor is an individual nominated by a dependant, nominee or successor of the member, or by the scheme administrator. The scheme administrator can only nominate an individual where there is no surviving individual or charity nominated by the beneficiary.
Why is it important for a member to nominate a beneficiary?
A dependant or named beneficiary can choose to take their benefits as a lump sum, an annuity or as nominee or successor flexi-access drawdown. The scheme administrator can only nominate a beneficiary to receive flexi-access drawdown where there is no surviving dependant or named beneficiary. If there is a surviving dependant or member nominee, the scheme administrator wouldn’t be able to pay flexi-access drawdown to anyone else; only lump sums can be paid.
Apart from being good practice, it is imperative that a member nominates and keeps their nominated beneficiaries up to date if they want them to have access to all death benefit options available under the scheme including flexi-access drawdown. This is accomplished by simply completing a one-page death benefits nomination form.
How do nominee and successor flexi-access drawdown operate?
Nominee and successor flexi-access drawdown operate in an identical manner to dependant’s flexi-access drawdown. In particular:
- No tax-free cash is available on establishing the nominee or successor flexi-access drawdown plan.
- No contributions can be paid to the flexi-access drawdown plan.
- Income payments to the nominee or successor are paid tax-free if the predecessor died before age 75. Otherwise, income payments are taxed at their marginal tax rate.
- The Money Purchase Annual Allowance (reduced annual allowance) does not apply to the nominee or successor in respect of taking income from the flexi-access drawdown plan.
What are the attractions of nominee and successor flexi-access drawdown?
The retirement freedoms have changed general thinking towards pensions. Nominee and successor drawdown are seen as an attractive means of:
- Passing down wealth through family generations under a pension wrapper. Some people have referred to this as ‘family pensions’.
- Retaining monies under a tax-advantaged environment until such time they are needed by the nominee or successor. Or if they are not needed, they can be passed down to the next generation on the nominee or successor’s death.
- Providing a flexible income to the nominee or successor as and when they need it. If their predecessor died before age 75, income payments are made tax-free. If a lump sum or annuity was chosen, these also would be free of income tax if the predecessor died before age 75.
So successor or beneficiary flexi-access drawdown is a wonderful way to gift your personal pension to your family and/or nominated beneficiary free of Inheritance Tax. You know it makes sense.*
The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a reliable indicator of future performance.
The contents of this blog are for information purposes only and do not constitute individual advice. You should always seek professional advice from a specialist. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.