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Surge in people using income drawdown for inherited pensions

Paloma Kubiak
Written By:
Paloma Kubiak

The pension freedom rules have prompted more beneficiaries to opt for income drawdown, according to figures.

Since the launch of pension freedoms in April 2015, investment platform firm AJ Bell has seen a 40% rise in the number of people choosing to keep inherited funds in a pension and use the new flexible income drawdown rules, rather than take a cash lump sum.

This is compared to the 30% of beneficiaries who chose the drawdown option in the same period before pension freedoms (April – December 2015) when pension savings were taxed at 55% on death.

With drawdown, money stays invested and you take an income when you need it.

AJ Bell believes the upwards trend is down to the pension freedoms which have:

  • Relaxed the rules so that a much wider range of beneficiaries can retain funds in a tax-advantaged pension, not just dependants
  • Made income drawdown more flexible so beneficiaries can draw unlimited sums as and when they need
  • Made the tax position for income drawdown more attractive than for lump sum payments when a person dies post age 75
  • Introduced the ability to pass on any residual funds upon second and subsequent deaths

Lisa Webster, technical resources consultant at AJ Bell, said: “The changes to pension death benefits have received less attention than the flexible withdrawal options but for some will be the most valuable change brought in by the pensions freedoms.  The ability to keep inherited funds invested and pass them through generations tax efficiently significantly enhances the long term value of a pension fund and it is encouraging to see more people taking advantage of this.”

Webster added that in light of the figures and the new freedoms, people need to ensure death benefit nominations are carefully thought through and kept up to date.