Drilling into drawdown: Before and after 6 April

Nigel Orange compares drawdown rules pre- and post-pensions freedom and answers some adviser FAQs

‘Radical’ is surely the right word to describe the changes to pensions coming into effect from 6 April.

Alterations to death benefit rules should also not be underestimated. They too are radical in terms of tax changes as well as to whole benefits can now be left.

Post-6 April, all crystallised/uncrystallised benefits, in lump sum or drawdown/annuity form, can be passed on free of tax provided the member was under age 75 at time of death.

Importantly, the definition of potential beneficiaries has been broadened from ‘dependant’ to ‘any beneficiary’, enabling pension funds to be used to a much greater extent in inheritance planning.

The table below outlines the different options in the old and new pension worlds and the tax-position of each event.

0315 Canada Life table
Here, Canada Life’s Nigel Orange answers some frequently asked questions advisers might have.

Instead of just dependants, who can now be a beneficiary for drawdown?

Orange: Literally anyone. A nomination can be made for a dependant and/or a nominee. A subsequent nomination can then be made by a dependant and/or nominee for a successor.
What if a valid nomination has not been made by the member?

Orange: The trustees/administrator can make a nomination but only in circumstances where there is not a surviving dependant. The trustee/administrator can also make a nomination if a valid nomination has not been made by a nominee and/or successor.

When can a payment be made to a charity?

Orange: Where the member is under age 75, a charity lump sum death benefit can be paid in respect of crystallised funds only, where a charity has been nominated and there are no surviving dependants.

Where the member is aged 75 or over, a charity lump sum death benefit can be paid in respect of crystallised and uncrystallised funds and again only as long as there are no surviving dependants. Such payments would not be subject to tax.

When is a successor nominated?

Orange: A nomination can be made by a member for a dependant and/or a nominee. At this stage, a successor cannot be nominated. A dependant and/or nominee can then make a nomination, but only for a successor. A successor can then make a nomination for a further successor. This process can continue as long as there are funds remaining.

Who can now qualify for a temporary ­annuity?

Orange: Anyone who qualifies for drawdown. This means a member, dependant, nominee or successor.

Are dependants’ annuities always tax-free?

Orange: In the case of a joint life annuity, upon the main annuitant’s death before age 75, the income passing to the spouse will be paid free of tax if payments commence after 5 April 2015 and death occurred after 3 December 2014.

Having read the latest draft legislation (made available on 18 February), it would appear that dependants’ annuities purchased from a dependant’s drawdown will be taxed if any income has already been withdrawn and if death occurred before 3 December 2014, otherwise dependant annuities will be paid tax-free consistent with the new pension legislation.

Nigel Orange is technical support manager (pensions) at Canada Life