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Pension Death Benefits

Q: I am soon to retire and need to make a decision about my personal pension funds. Can you confirm whether drawdown plans - where a pension is taken directly from the pension fund - have better death benefits those provided by an annuity bought with the pension fund?

A; This is true in most cases. Annuities can have some spouses' benefits included, but these are often expensive (which means a lower pension) and limited to 50 per cent of the annuity's value.

Death benefits with a drawdown plan - which is effectively a retirement vehicle still invested in funds - depend on whether you have taken the tax-free cash or not.

If you take your 25 per cent tax-free cash, you can decide whether you want the remainder to pay an income or defer income until later on.

Either way, the fund has 'crystallised' and on your death, your beneficiary can choose to have an income with no tax to pay, or a lump sum, that will carry 35 per tax, but in many cases be less than the loss on an annuity.

If you decide to take phased drawdown, by only 'crystallising' a proportion, then the uncrystallised remainder will pay 100 per cent to your beneficiaries.

The last option is to do nothing until you feel you need to. That also means the fund will not have crystallised.

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