‘I’ve inherited my husband’s drawdown pension. What now?’
Losing a loved one is always traumatic and the subsequent sorting out of financial matters can also be a worry.
If your husband was drawing income from his pension there are a number of options open to you.
Here, Martin Tilley of Dentons Pension Management, outlines the choices:
Firstly, it is most likely that the pot of money remaining will be held in the pension scheme outside of your husband’s estate and as a result it will not be governed by his will. This means the monies could be paid directly, flexibly and tax efficiently.
Check for an ‘expression of wish form’
The first thing to check is whether your husband had completed a “form of nomination” or “expression of wish form” and lodged this with the pension provider. This communication will have set out his wishes for the distribution of his pension fund on death and whilst not binding, the pension provider must take this into account when determining beneficiaries.
If funds have been left to you, they can be withdrawn by you at amounts and rates of your choosing, effectively continuing the drawdown. But be careful as the payments will be taxed at your marginal rate of income tax and therefore taking the monies out in one go or in large tranches could easily push you into higher tax bands. Instead you might like to consider smaller annual amounts, keeping you below your next tax threshold.
Consider an annuity
Also bear in mind how quickly you might erode the fund. If you need the regular income to live you might wish to consider an annuity which would guarantee payments for your lifetime. An annuity also removes the worry of investment risk and returns, which is a feature if you continue drawdown.
A disadvantage of an annuity, however, is the loss of control of capital in exchange for the income guarantee. If you continue in drawdown and have not exhausted the fund by the time you die, you will also be able to pass on any remaining monies to your chosen beneficiaries. You should complete an expression of wish form and lodge this with the pension provider so they will know what you want to happen.
Make payments to children or grandchildren
It is possible that if you do not need any income from the pension now and if your husband made provision, that the pension provider could bypass you and make payments directly to any children or grandchildren, with payments again made in tranches which would be taxed at their income tax rates. Grandchildren, for example, who are not earning are able to receive up to £11,000pa before any tax would be payable.
It would be wise to obtain the alternative options from the pension provider and consult a financial adviser who would be able to take into account your other financial assets and recommend a suitable plan.