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Retirement

A guide to inheriting a Pension

Written by Connor Mullins on Jun 27th, 2024 Time to read: 5 minutes

A Pension is one of the main assets that many individuals own and can be one of the biggest legacies you can leave, along with property, after you’re gone.

It typically sits outside of a person’s estate* for Inheritance Tax purposes, however, there may be some other taxes to consider, such as income tax.

Private pension wealth makes up 42%** of UK household wealth and provides an important part of saving for retirement in the UK. According to the most up-to-date figures from the Office for National Statistics, the workplace Pension participation rate in the UK was at 79%** (22.6 million employees) in April 2021.

This blog will take a look at the details around inheriting a Pension and the circumstances around whether you will be required to pay tax.

Inheriting a Pension – what can be passed on?

A State Pension can’t be passed on, but you may be able to claim extra payments from your husband, wife or civil partner’s State Pension after their passing providing you are over State Pension age.

What you get and how you claim will depend on whether you reached State Pension age before or after 6 April 2016. Contact the Pension Service to check what you can claim.

Passing on a Defined Contribution Pension may depend on a few factors – the type of scheme, the age the person dies and whether they’ve already accessed some of the money. If you have or inherit a defined contribution pot you can nominate someone to get any money you do not use before your death. It’s important to note – the money must be in a flexi-access drawdown fund when you die.** It may be beneficial to seek financial advice before making any decisions.

A Final Salary or Defined Benefit Pension can’t be passed in the same way as a Defined Contribution Pension. It could be beneficial to speak to a financial adviser to discuss your options further if you have a Defined Benefit Pension.

Who can get payments from a Pension?

The person who died will usually have nominated you as the beneficiary, so if you withdraw the money, you may be liable for Income Tax. Usually, the recipient can choose whether to take a lump sum or a regular income from the Pension pot.

What are the tax implications with inheriting a Pension?

Whether you pay tax usually depends on:

  • The type of payment you get
  • The type of Pension pot
  • The age of the Pension pot’s owner when they died

If the person dies before the age of 75, you will not pay income tax on withdrawals from the pot – unless your lump sum is above the Pension pot owner’s lump sum and death benefit allowance**.

If they die after the age of 75,  any money paid out will be subject to tax, based on your individual tax position. For basic-rate taxpayers, the rate will be 20%, for higher-rate taxpayers it’ll be 40%.

You may also have to pay tax if the Pension pot’s owner was under 75 when they died and you’re paid the lump sum more than 2 years after the Pension provider is told of the death.

It can seem complicated – it may be beneficial to speak to a financial adviser and check more details on the government website here**.

Passing on a Pension pot you inherited

If you inherit a Defined Contribution** pot you can nominate someone to get any money you do not use before your death – this must be in a flexi-access drawdown fund when you die. You can find out more information on the Government website here**.

Consolidating your Pensions

If you have inherited Pensions, you could consider consolidating them to help build your Pension pot. You can invest up to £60k each tax year (your annual allowance) and you’ll get contributions into a Pension pot topped up by between 20% and 45% tax relief, depending on your rate of tax. However, there are some things you should consider before combining your pensions.

Setting up a Pension for your grandchildren

If you have money to spare, you could also think about opening a Pension for your grandchildren.

You can invest up to £2,880 a year into your child’s True Potential Junior Pension and the government will add in £720 basic tax relief (20%) taking the total to £3,600.

A Pension for an Under 18 has two main benefits over a Junior ISA*:

  • Contributions attract up to 20% tax relief
  • The child cannot access their money until 57 (from 2028) – meaning it can be used for helping them to achieve their long-term goals

So whilst a Junior Pension provides a long-term investment option for a child’s future, they won’t be able to access their money until they reach the normal minimum Pension age. It’s important to remember that with investing your capital is at risk and investments can fluctuate in value over time, meaning you may get back less than you invest.

Make the most of your Pensions with True Potential

If you’re a True Potential Wealth Management client and have any queries about the tax implications associated with inheriting a Pension, you can speak to one of our financial advisors or call our Relationship Management Team on 0191 500 9164. They’re available 7am-8pm on weekdays and 8am-12pm on Saturdays.

If you do not currently invest with True Potential and would like to find out how we can help you do more with your Pension, contact us today – we are happy to speak through the available options and help you do more with your money. Please call one of our experts on 0191 625 0350 to get started.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. This material is not a personal recommendation or financial advice and the investments referred to may not be suitable for all investors.

Tax rules can change at any time. ISA eligibility and tax rules apply. Pension eligibility and tax rules apply. You should ensure your contribution does not result in your total Pension contribution within the tax year exceeding £60,000 or 100% of your earnings, whichever is lower.

 

Sources

*True Potential – accessed on 24/06/24

/blog/a-guide-to-estate-planning/

/investments/junior-isa/

**Other – accessed on 24/06/24

https://www.gov.uk/state-pension-age

https://www.gov.uk/contact-pension-service

https://www.gov.uk/personal-pensions-your-rights/how-your-pension-is-paid

https://www.gov.uk/guidance/find-out-the-rules-around-individual-lump-sum-allowances#individual-lump-sum-and-death-benefit-allowance

https://www.gov.uk/tax-on-pension-death-benefits

https://ifs.org.uk/articles/private-pensions-explained

https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/workplacepensions/bulletins/annualsurveyofhoursandearningspensiontables/2021provisionaland2020finalresults#:~:text=1.,(COVID%2D19)%20pandemic.

 

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