Why will my children be taxed 55% when I die?

17 March 2014

Q

My pension is taken under drawdown and when I die my children will inherit my fund. I understand they will be taxed at 55%. Why is this higher than normal tax rates? Can my family retain the fund and continue to take the income from drawdown?
From
TS/Colchester

A

The death benefits from a pension vary depending on how the plan has been used. If there is any portion of your pension where tax-free cash has not been taken, then the full value of the fund would be paid to your estate without income tax or inheritance tax, if you died before the age of 75. Where tax-free cash has been taken, by means of drawdown, the balance of the fund remains invested.

This provides the means for drawdown income to be taken without the requirement to purchase an annuity. If you are married, or have dependants – children under the age of 23, or older than 23 who are disabled – then the full value of the fund can be passed to them and your spouse and used either to purchase an annuity to provide income or to remain in drawdown.

Alternatively, such dependants can receive the fund as a lump sum after payment of tax of 55%.

If, in the event of your death while in drawdown, you are not married and do not have any dependants, then the only alternative available is to pay the fund, net of 55% tax, to your estate.

Should your estate be subject to inheritance tax at 40%, then no additional liability will be charged against any drawdown payment.