Reinvesting inherited pension

JuliaGulia

Hi,

My husband died 6 months ago and I have inherited his private pension - tax free.

I was wondering if can I live off the inherited cash and re-pension my salary each month to benefit from further tax relief or would this not be permitted under the new pension recycling restrictions?

Initially I planned to re-pension the investment, transferring it directly into my name but a relative had suggested this. It wouldn't be typical pension recycling as it's not my pension...

If anyone has any advice, I'd be very grateful.

xylophone

Your idea would be to use your salary to make the maximum pension contributions possible whilst living on your nominee pension income?

https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/tax-relief-and-contributions

It would appear from the below that you can do this.




http://www.scottishwidows.co.uk/extranet/literature/doc/fp0621

RECYCLING INCOME

When pension freedoms were introduced allowing full
flexibility to withdraw income, it was feared that those aged
55 or over could divert most or all of their income in this way.
If this was done via salary sacrifice the savings would be far
greater as both employers and employees could pay less
national insurance. The MPAA was introduced to restrict this.

But

http://www.pruadviser.co.uk/content/knowledge/technical-centre/money_purchase_annual_allowance_mpaa/#

However, should the income be taken from any dependant, nominee or successor drawdown plans or assets that can be wholly attributable to a Disqualifying Pension Credit* then the MPAA will not be triggered.

jamesd

What happens is in general that you* can have the money all in what's called a "beneficiary pension". You can take any amount of money out of this tax free whenever you like, no age restrictions. And until you take it out it all grows tax free, like a super-ISA.

What this huge benefit means is that it's usually best to leave the money in the beneficiary pension until you want to take some out to spend it.

As xylophone has explained, yes, you can take the money out to recycle into more pension contributions to get more tax relief. The reasons you can do this are in two parts:

1.There are restrictions on how much of a pension commencement lump sum can be recycled. When people write about pension tax free lump sums this PCLS type is the one they mean. But yours isn't a PCLS so those PCLS restrictions don't apply.

2. The money purchase annual allowance is only triggered by specifically defined flexible drawing events. The common ones are taking a 25% tax free and 75% taxable UFPLS lump sum or taking any taxable money from the taxable 75% in a flexi-access drawdown pot. Your money isn't one of these specific types and the MPAA doesn't apply.

What you have instead is a completely catch free tax free lump that you can use in whatever ways you wish.

So yes, do get it put into a beneficiary pension in your name. That way it immediately has all of the pension tax benefits with none of the big restrictions. Then you can just set it up to pay you the monthly amounts to use for the extra tax relief.

You don't have a one or the other choice, you can both have it start out in a beneficiary pension and use it to let you get the tax relief from new pension contributions. So do.

If there are any children around it's worth considering the potential benefit to them. There's no age restriction for taking the money out - a baby, via their trustee, can. So for them it can be like a big ISA. So it's worth thinking a bit about whether having some go into beneficiary pensions for each child would be useful. The trustee, normally the parent, can take out money to pay for any of the child's normal living needs and at 18 control passes to the child. Whether this is useful depends in part on just how much money is involved, it's more likely to be useful for larger inheritances.

* this is specific to the original person dying before age 75

JuliaGulia

Thanks all. I really appreciate the feedback.

I have my own 15 year DB pension and my company have just transferred all employees over to a DC pension to which I pay in 15% of my salary so effectively I've got my own pension arrangements in place. I have 2 dependants and still a long career ahead of me.

The suggestion from a relative was to simply live off the cash lump sum and put all of my net salary into a pension. Is that what you're suggesting is possible to do with a beneficiary pension? I just don't want to be breaking any laws but I'm unlikely to be in this position again.

kidmugsy

JuliaGulia wrote: »

my company have just transferred all employees over to a DC pension to which I pay in 15% of my salary so effectively I've got my own pension arrangements in place. I have 2 dependants and still a long career ahead of me.

Can you pay into the occupational pension via Salary Sacrifice aka "Smart" pension? Because if so it would be very tempting to contribute the maximum in that way (your employer would ensure that you were left earning at least minimum wage). You'd then be paying next-to-no income tax or national insurance contribution. You'd make up the amount you need for living by drawing from your beneficiary pension.

You might not want to pursue that policy for more than a few years because you might not want all your capital tied up in a pension you can't access until you are 55 (or whatever the magic age is then). Similarly, you might want to hold fire for a little if there's some prospect that you'll want to avoid higher rate tax in future. But nonetheless I'd reckon it an especially tempting variant of what your relative suggested.