The quick, or perhaps not so quick answer to this question can be found in the small print of your pension fund rules and regulations. The tax position and the practical answers tend to fall into the following broad headings

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Up to age 75 you will have a degree of flexibility in the way in which you chose to take benefits from your fund. After age 75 you will be required to crystallise your fund – draw an income from your fund or buy an annuity. Interestingly after age 75 you also lose the right to take a tax free lump sum.

Usually you can crystallise your pension fund from age 50 (until 5 April 2010), 55 after 5 April 2010. In the event of your death before age 75 your dependents have two choices:

• your spouse, civil partner or other dependents can use your fund to provide a pension. Any pension received would be taxed as earned income in the usual way, or

• your beneficiaries could elect to take the entire fund less a tax charge of 35%.

Once you have taken an annuity (i.e. you have purchased the right to a guaranteed income for the rest of your life) when you do die the right to the income ceases unless:

• the annuity provides for a guaranteed minimum period of payment and part of that minimum period is unexpired, or

• the annuity provides for a spouse or civil partner’s pension.

In all cases once an annuity is purchased the right to recover any of the pension fund surrendered is lost.

After age 75 the situation is a little more complex!

If an annuity is purchased the above comments still apply. However it is possible to take an alternatively secured pension, an ASP, This provides for an income, a pension, but does not require you to part company with your pension fund. If you die whilst taking an ASP the following choices apply:

• the fund may be used to provide a pension for a spouse, civil partner or other dependent, subject to tax.

• on the subsequent death of the spouse, civil partner or other dependent the fund can be passed to a charity with no tax charge.

• if the fund is not passed to a charity it is subject to inheritance tax (at 40%). The residual 60% then remains unallocated. The legislation is unclear on how the unallocated fund can be used or indeed how long it remains unallocated. However if the pension scheme rules allow, it may be possible to add additional members and benefit them accordingly.

So the answer to the question, what happens to your pension fund when you die, is complicated. If you need clarification regarding your own scheme have a word with the Independent Financial Advisor who set the scheme up for you. If you need advice on the tax consequences we would be happy to take a look for you.

Related articles

• 5 ways to cut inheritance tax (telegraph.co.uk)
• Making your golden years greener (economist.com)
• Pensions: is my money safe? (telegraph.co.uk)

If you are of pensionable age, (presently 55 or 50 if you were born before 6 April 1960) here is some information you could find very interesting. The illustration below shows you for example that a higher rate tax payer can start to draw an income (pension) from a fund of £37,500 at a cost of just £17,500 – the balance of the funding comes from the Government. You can choose to take a drawdown rather than an annuity, and in this case the funds are invested – possibly in property or on the stock market. If that fund is invested well, it could show good growth in the future – and in five or ten years time, maybe right now might prove to be a good time to make such an investment!
Qualifying pension contributions continue to attract tax relief for individuals at their highest rate, potentially 40%. Tax Relief of 20% is usually deducted from the payment you make to the pension company – they reclaim this from the Treasury. Any higher rate relief needs to be claimed via your tax return.

If you are of pensionable age, presently 55 or 50 if you were born before 6 April 1960, you can accelerate the tax and cash benefits of single, lump sum contributions by opting for an immediately vested investment.

What you do is:

(This illustration assumes that all of the qualifying contribution can be relieved at the 40% income tax rate)

• Make a payment to a pension provider of say £40,000

• Pension provider recovers the 20% tax deemed to have been deducted of £10,000

• You claim an additional 20% higher rate tax relief, £10,000

• You immediately vest the fund created (£40,000 + £10,000) after taking 25% or £12,500 as a cash free lump sum

Result:

• You have created a fund of £37,500 (£50,000 less lump sum £12.500). You could start to take an annuity or drawdown based on this fund. The amount of the drawdown or annuity will depend on current annuity rates.

• You have invested net funds of just £17,500 to do this. (£40,000 less higher rate tax relief £10,000 and cash lump sum £12,500)