Inheriting pension - tax question

beeza650

I'm not drawing on my pension (I'm 46). If I die, my pension is inherited by my beneficiaries (my children). What I don't understand is the tax situation - can they cash in the pension tax free? Thanks

TcpnT

Not enough info. What type of pension is it?

beeza650

...one is a SIPP, the other(s) are arranged by my employer - defined contribution.

dunstonh

For 99% of cases death before age 75 means they can get the money tax free (not subject to IHT or income tax) either as a lump sum or an income.   Death after 75 would still pass to them without tax within a pension.  However, if they then drew on that pension, it would be subject to income tax at their applicable rates.
If the nomination is binding on the trustees rather than just being a nomination/expression of wish which leaves the final decision with the trustees, then tax will come into play.  For most people this will not apply.     This scenario is so unusual that it is often not mentioned at all when asked this question.   Its probably a less than 1% scenario.  

tacpot12

The tax situation for both these pensions will depend on the age at which you die. If you die before you are 75, your beneficiaries inherit the pension money, and can withdraw it tax free, or they can leave it with the provider where the money will grow tax free. If you die on or after your 75th birthday, then they have to pay income tax on anything they take out of the pension. They can't take out 25% tax free from a pension that they have not contributed to - this tax 'perk' is only available with pensions that you have personally contributed to. 

The best advice to your beneficiaries is to leave the money where it is until they retire and use it to give them a better retirement than they otherwise would have had.  Only if there is an urgent requirement to clear debts (e.g. their house is about to be repossessed) would it make sense to draw the money out if they have to pay income tax above the basic rate on it. 

NedS

What about if the OP dies aged between 55 and 75, and has already accessed the pension? Can the beneficiary still withdraw the remainder tax free then?

zagfles

NedS said:

What about if the OP dies aged between 55 and 75, and has already accessed the pension? Can the beneficiary still withdraw the remainder tax free then?

Yes.......

beeza650

Thanks all for advice - that's good to know - helps a lot with planning how much Family Income Benefit Insurance to buy. I've got a fairly healthy pension pot that can be dipped into by the kids when they need to.

squirrelpie

beeza650 said:

I've got a fairly healthy pension pot that can be dipped into by the kids when they need to.

Just hope they don't need it whilst you're still in good health! You might have an 'accident'

triplea35

tacpot12 said:

The best advice to your beneficiaries is to leave the money where it is until they retire and use it to give them a better retirement than they otherwise would have had.  Only if there is an urgent requirement to clear debts (e.g. their house is about to be repossessed) would it make sense to draw the money out if they have to pay income tax above the basic rate on it. 

If you died before age 75 would it not be better for the beneficiary to take the pot tax free and, if keeping it for retirement feed it into their own pension and by doing so obtain further tax benefit? 

zagfles

triplea35 said:

tacpot12 said:

The best advice to your beneficiaries is to leave the money where it is until they retire and use it to give them a better retirement than they otherwise would have had.  Only if there is an urgent requirement to clear debts (e.g. their house is about to be repossessed) would it make sense to draw the money out if they have to pay income tax above the basic rate on it. 

If you died before age 75 would it not be better for the beneficiary to take the pot tax free and, if keeping it for retirement feed it into their own pension and by doing so obtain further tax benefit? 

They will be limited in how much they can put in their pension each year by earnings/AA, so why take the whole pot (unless small), would likely be better to take it over a number of years.