Members should, therefore, check that any beneficiaries they would like to benefit from drawdown are either a dependant or are named on the nomination form.
It is possible to set up BFAD for non-dependant, non-nominees, but only if there are no dependants and no one has been nominated. It be would unwise, however, to rely on this.
Dependants and nominees can have beneficiary drawdown set up for them following the death of the scheme member.
Where a beneficiary leaves inherited drawdown to a subsequent beneficiary, this will be successor’s flexi-access drawdown.
Beneficiary annuity
A related annuity can be set up during the member’s lifetime when the member purchases their own lifetime annuity. This is explained further in HMRC's PTM072200.
It is also possible to purchase a beneficiary’s annuity with the funds held in a DC pension scheme following the death of the member or previous beneficiary.
This means uncrystallised funds and drawdown arrangements. Where the member (or previous beneficiary) purchased their own annuity, this option is no longer available as the funds are no longer held in a registered pension scheme.
A beneficiary’s annuity can be set up for any beneficiary, following changes in 2015 that allow an annuity to be purchased for a dependant or nominee – much like the rules for drawdown above.
This means the beneficiary must be either nominated or a dependant or there must be no dependants or nominees.
A beneficiary annuity can also be set up for a minor, but the income payments must cease at age 23 provided they are not still a dependant.
The term 'beneficiary’s annuity' is also an umbrella term made up of dependant’s annuity, nominee’s annuity, and successor’s annuity.
A dependant’s or nominee’s annuity can be set up during the member’s lifetimes as a related annuity or after the death of the member.
A successor’s annuity is purchased after the death of a dependant, nominee or previous successor using undrawn funds, which means the previous beneficiary’s flexi-access drawdown fund.
Taxation of income death benefits
The tax treatment depends generally on whether the member (or previous beneficiary) died before or after age 75, but it is important to clarify there is no test against the LSBDA.
Pre-75 deaths:
Where the member (or previous beneficiary) died before age 75 and BFAD was set up within two years of death (or within two years of the earliest date the scheme could reasonably have been expected to learn of the member’s death), beneficiaries are not subject to income tax on income payments.
