This applies irrespective of the amount designated to drawdown. Designations after the two-year period result in marginal rate income tax being charged. 

Post-75 deaths:

Where the member (or previous beneficiary) died on or after age 75, beneficiaries are subject to marginal rate income tax on all withdrawals from BFAD. The two-year period for designation to drawdown does not apply for post-75 deaths.

Which tax treatment applies depends on the age at death of the most recently deceased individual.

For example, if the member died at age 77, the first beneficiary will be subject to marginal rate tax on withdrawals.

If that beneficiary dies at age 73, the subsequent beneficiary will receive BFAD payments free of tax.

Nomination forms

Where the pension scheme pays death benefits from a discretionary trust, it is very important that a nomination form is completed.

While not legally binding, they help clarify the member’s wishes and give guidance the scheme trustees.

In most cases, provided they are not unreasonable, the nomination will be followed.

Regular reviews should take place to ensure the nomination reflects any changes of circumstances, which is preferable to attempting to cater for future changes within one form – eg ‘to my spouse if alive, otherwise to my child if alive, etc’.

Writing a new nomination each time circumstances change ensures the scheme trustees have the most up-to-date guidance.

In terms of death benefit options, nominating a non-dependant beneficiary also ensures that BFAD can be set up for that individual, which in many cases is a superior to a lump sum.

One such solution caters for a member who wishes to leave death benefits to a spouse but would also like to ensure that drawdown is available to their children.

In this instance, naming the spouse and both children on the nomination form to receive 98 per cent, 1 per cent and 1 per cent respectively makes clear that the intention is to let the spouse inherit the death benefits, but in the event that she wants to forgo those benefits in favour of the children the scheme are able to establish BFAD for each of them.

And finally, nominations are not just for the scheme member.

Once in receipt of BFAD, a beneficiary is free to make their own nomination.

On their death, the scheme again will exercise their discretion, taking the new nomination into account, and can pay further death benefits to the next beneficiary, referred to as a successor.

Thomas Coughlan is tax and pensions specialist at Scottish Widows