What if you die? The “inheritability” issue

This section covers what happens to your pension income if you die, which depends on which product you have chosen to pay your income.

Annuity. You decide at the outset whether you wish to take a lower income to ensure that your spouse or dependant has an income, if you pre-decease them. You can also choose a guarantee period, as we saw earlier. Otherwise, once the conventional annuity is purchased, there is nothing to be inherited by your estate, and once the annuity is purchased, you cannot subsequently change your mind.

Phased retirement. Only part of your retirement fund provides an income each year, and the balance of your fund should pass to your heirs, free of inheritance tax. Providing you aren’t taking too much income, the balance of the fund that can be inherited can remain substantial.

Even so, this inheritability feature only runs to age 75. At that point, the whole of the balance of your fund has to purchase an annuity (assuming that the theoretical alternative of ASP is either not available or unattractive for most). If you purchase a conventional annuity, your pension fund cannot then be inherited by your heirs (though you can include widows benefits or a guarantee period as explained above). Flexible or third way annuities may continue to provide some inheritability benefit beyond age 75, but you would have to balance these against the risks and added complexity.

Income drawdown (or Unsecured Pension income/USP). Instead of buying a conventional annuity, you draw your income directly from your pension fund each year, and the balance of your fund is available to your heirs. This will usually be paid to your heirs free of inheritance tax but subject to a special tax charge of 35%.

As with phased retirement, the inheritability feature only runs to age 75. At that point, the whole of the balance of your fund has to purchase an annuity, though you can buy a flexible annuity, as discussed above.

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