Beneficiary Flexible Access Drawdown BFAD
Published / Last Updated on 07/12/2021
Investment Linked Pension Funds on Death: Firstly, most pension funds (although not all) are in trust i.e., they do not form part of the deceased’s estate for inheritance tax.
- Death Before Age 75 – pensions funds, whether uncrystallised (i.e., untouched/no withdrawals taken) or already been crystallised (i.e., lump sums or income accessed by capped or flexible drawdown) can pay out the full fund value to loved ones/beneficiaries on death tax free.
- Death After Age 75 - pensions funds, whether uncrystallised (i.e., untouched/no withdrawals taken) or already been crystallised (i.e., lump sums or income accessed by capped or flexible drawdown) can pay out the full fund value to loved ones/beneficiaries subject to their own taxation position.
Options for Beneficiaries on Death
Whether funds are taxable or not, depending on the age of the deceased, most beneficiaries will have the following options:
- Pay out the fund value as a lump sum to the beneficiary (taxable or tax free depending upon age at death)
- Buy an annuity (taxable or tax free depending upon age at death
- Convert to Beneficiary Flexible Access Drawdown (BFAD)
What is Beneficiary Flexible Access Drawdown (BFAD)?
It means what it says, it is flexible drawdown for beneficiaries operated in the same way as for normal flexible drawdown. Beneficiary benefits will be taxable or tax free depending upon age at death of the deceased as above.
Beneficiary Flexible Access Drawdown (BFAD) allows individuals to pass on pension benefits in a manner where the beneficiaries have immediate access to the funds after death, while retaining some of the main advantages of being within a pension arrangement. This includes tax-free growth and favourable IHT treatment.
Who Offers BFAD?
Most new pension schemes offer Beneficiary Flexible Access Drawdown (BFAD), but some older pensions schemes may not. If the older style pension scheme does BFAD, it should be possible to transfer the deceased’s pension fund to another firm offering BFAD before beneficiaries then start the drawdown pension benefits.
The rules for who can receive pension funds as a BFAD arrangement are quite complex and with the option to “nominate” non-financial dependants means that you or your financial adviser should regularly review and update any ‘death nomination’ Expression of Wish forms to try and ensure those that you wish to benefit from your pension fund on death will do so.
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