Inheriting DC Pension Funds That Had Already Been Inherited Previously

EmEssEee

I understand that, when a pensioner dies before age 75, they can leave their Defined Contribution funds to their beneficiaries and that these funds can then be drawn by the beneficiary free of income tax (whereas, if death occurs after 75, then income tax would be payable at the beneficiary's marginal rate as and when they withdraw funds).

I have the following scenario in mind: my wife and I are the same age, if I die before age 75 and leave my pension funds to my wife then they would be available to her free of income tax, but what happens to any of those funds which are still remaining after my wife dies?  

1. If she dies before her age 75, I presume the funds could then be passed on again to our daughter and similarly be free of income tax. Is that right?
   
   
2. What happens if my wife dies after age 75? Would our daughter be liable to income tax on the funds which came from my pension but which she inherited via my wife (because my wife died after 75 even though I died before 75)? i.e. although they were tax free when passed to my wife, when she passes them on to our daughter will they become taxable? 

If the answer to 2 above is that our daughter would have to pay income tax on the "secondary" inherited funds, then, purely from a tax point of view, it would seem to be more tax efficient for me to leave my funds directly to my daughter so that she would get them tax free, rather than leaving them to my wife and risk our daughter having to pay tax on them if my wife dies after 75.

Also, what are the logistics of managing these beneficiary funds if they are not taken as an immediate lump sum?  Would they be put into a beneficiary flexi-access drawdown pension?  Do most SIPP providers (e.g. Vanguard) also tend provide these sorts of beneficiary arrangements?

Thanks.

xylophone

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

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. The money must be in a flexi-access drawdown fund when you die.

Then see chart underneath the above.

EmEssEee

@xylophone, thanks for that.  That certainly confirms that an inherited pension pot can be passed on, and the table clarifies the tax position, at least for the first beneficiary to inherit. 

However, I'm still not clear what tax is payable when the first beneficiary dies and the inherited pension is passed on again to a second beneficiary.  I guess it all rests on what is meant by the "owner" when it says "Age its owner died" in that chart. Is that the age of the original owner at their death, or the age of the second owner (i.e. the first beneficiary) at their death? 

So, in the scenario where I pass my pension on to my wife on my death before age 75 (free of income tax), and then, on my wife's death after age 75, she passes the remaining funds to our daughter, is the "Age of the owner" then my wife's age at her death (in which case, daughter pays income tax) or my age at my death (in which case daughter gets it tax free)? 

i.e. if someone dies before age 75 are those funds then free of income tax forevermore, regardless of how many times it's inherited and regardless of the ages of each beneficiary at their death; or, does the tax status for each beneficiary depend on the death age of the previous beneficiary?

Thanks.

xylophone

See (with examples)

https://techzone.abrdn.com/public/pensions/Tech-guide-DC-death#:~:text=estate for IHT.-,Inherited drawdown,can use an inherited fund.

As the taxation depends on the age at death of the last owner of the fund (i.e. the original member or subsequent beneficiaries) it's possible for withdrawals from an inherited fund to be taxed differently as it passes to new beneficiaries on successive deaths.

EmEssEee

Thanks @xylophone, that answers my questions perfectly.  I really appreciate your help.

Albermarle

EmEssEee said:

Thanks @xylophone, that answers my questions perfectly.  I really appreciate your help.

Be aware that tax/pension legislation can change.
The tax treatment of pensions on death is seen by many as too generous, and could well be changed in future, especially with a new government.
The rule about pensions inherited from a person who dies before 75, being totally tax free, is particularly difficult to justify.
Death and taxes and pensions | Institute for Fiscal Studies (ifs.org.uk)