If a beneficiary dies still holding some of the funds in drawdown, their own beneficiaries can also inherit those funds under the same rules.
Drawdown is often considered the most flexible and tax-efficient death benefits option under the current rules. Unfortunately, it is also an option which will not always be available.
The trade-off for the much more advantageous death benefits rules is that they have also become more complex, and there are some tricky hoops for individuals to jump through in order to ensure that their beneficiaries can take full advantage.
Central to this is the expression of wishes. The current position was achieved by adding two new categories of beneficiaries who are eligible to purchase an annuity or go into drawdown alongside dependants: nominees and successors.
A nominee is defined as a beneficiary of the original scheme member who is not a dependant, who has been chosen to be a nominee either by the scheme member (that is, on their expression of wishes) or by the scheme administrator (that is, by exercising their discretion).
However, a scheme administrator cannot make a beneficiary a nominee if there are surviving dependants of the member, or if the member had chosen any individuals or charities to receive death benefits.
In other words, if the administrator bypasses an expression of wishes or a dependant to give benefits to someone else, they can not offer them drawdown. Once a dependant or nominee is in beneficiaries’ drawdown, they may also die without having withdrawn all of the funds. The scheme administrator is then able to distribute those remaining funds to new beneficiaries.
The dependant or nominee can make an expression of wishes in the same way as for their own pension benefits. In order for a beneficiary of a dependant or nominee to be eligible for an annuity or drawdown, they must be classed as a successor. If a successor then dies holding funds in drawdown, the same is true for their beneficiaries.
A successor is a beneficiary who has been chosen to be a successor either by the deceased beneficiary (that is, the current owner of the funds) on their expression of wishes, or by the scheme administrator.
A scheme administrator cannot make a beneficiary a successor if the deceased beneficiary had named any individuals or charities to receive death benefits. This is similar to the restriction in place for nominees: if the scheme administrator bypasses an expression of wishes to pay death benefits elsewhere, they can only offer a lump sum.
The sequence of events below is relevant, assuming each person is eligible for and chooses drawdown.
