Inheriting a pension: what happens and is there tax to pay?

MSE_Kit

This is the discussion thread for the Inheriting a pension guide.

The guide discusses topics such as:

- Inheriting a defined contribution pension
- Inheriting a defined benefit pension
- Inheriting part of your spouse's state pension
- Tax on an inherited pension
- Transferring wealth through a pension
- Inheriting a pension FAQs

If you haven't already, join the forum to reply.

Albermarle

It is usually worth pointing out that the current legislation regarding all these topics, may change at some point in the near or far future.
The tax regime surrounding Pensions and dying is rather generous, so some parts of it may come under scrutiny, especially with a  new government in the offing.

Marcon

Technically you can't inherit a DB pension. You might benefit from a survivor's pension payable by the scheme, but that's not quite the same thing.

Marcon

'Most modern workplace pensions are defined contribution pensions – as are trust-based pensions, group personal pensions and stakeholder pensions.'

Most DB pensions are trust based, so suggesting that because a pension is trust based it is usually DC is misleading.

Marcon

'Depending on the scheme's rules, you might be able to nominate someone other than a close dependent to inherit your defined benefit (final salary). However, this will normally result in the inheritor having to pay a 55% unauthorised payment charge on any money they take.'

Why? If the scheme rules permit such a nomination, on what grounds would it 'normally' be unauthorised? Unmarried partners are frequently nominated, even when there is no actual financial dependency.

I think the wording you've used suggests confusion with DC arrangements - you don't 'take' money from a DB scheme, they pay it out.

Brie

Marcon said:

'Depending on the scheme's rules, you might be able to nominate someone other than a close dependent to inherit your defined benefit (final salary). However, this will normally result in the inheritor having to pay a 55% unauthorised payment charge on any money they take.'

Why? If the scheme rules permit such a nomination, on what grounds would it 'normally' be unauthorised? Unmarried partners are frequently nominated, even when there is no actual financial dependency.

I think the wording you've used suggests confusion with DC arrangements - you don't 'take' money from a DB scheme, they pay it out.

I'm surprised this isn't mentioned in any of the DB information my OH has received recently.  The scheme has no way currently of knowing if I'm married to him or not and even if they have my name (they should as nominated beneficiary) they can't assume we're married, particularly as we have different surnames.  One would have thought there would be something mentioned even if it was in the small print.

Marcon

'It's sometimes possible to convert a defined benefit (final salary) pension into a defined contribution pension. In other words, substitute the regular income you get from a defined benefit pension for a lump sum in a defined contribution pension pot.'

Do you mean conversion, or transfer? They are not the same:

Some members might wish to convert their safeguarded benefits into flexible benefits within the scheme (or exercise a right to take an internal transfer). The most common example is a conversion of DB benefits to DC benefits within the same scheme. There is no statutory obligation for schemes to permit this and the exact method of conversion or internal transfer will depend on the scheme’s trust deed and rules. In addition, where members are converting to DC benefits within a scheme, there is no obligation to provide the new decumulation options permitted after 6 April 2015. It is up to trustees and employers to determine which options to offer and to amend their rules accordingly.

https://www.thepensionsregulator.gov.uk/en/document-library/scheme-management-detailed-guidance/administration-detailed-guidance/db-to-dc-transfers-and-conversions#0ef9b52942e540149f0edab4007bba18

Marcon

'If there's somebody specific in mind who you'd like to inherit your pension after you die, it's important to nominate that person in writing. Fail to do so and your pension provider is far less likely to give it to them.'

...and quite simply won't if it's a DB scheme and the rules of the scheme don't allow your choice of nominee. 

Marcon

Brie said:

Marcon said:

'Depending on the scheme's rules, you might be able to nominate someone other than a close dependent to inherit your defined benefit (final salary). However, this will normally result in the inheritor having to pay a 55% unauthorised payment charge on any money they take.'

Why? If the scheme rules permit such a nomination, on what grounds would it 'normally' be unauthorised? Unmarried partners are frequently nominated, even when there is no actual financial dependency.

I think the wording you've used suggests confusion with DC arrangements - you don't 'take' money from a DB scheme, they pay it out.

I'm surprised this isn't mentioned in any of the DB information my OH has received recently.  The scheme has no way currently of knowing if I'm married to him or not and even if they have my name (they should as nominated beneficiary) they can't assume we're married, particularly as we have different surnames.  One would have thought there would be something mentioned even if it was in the small print.

Check your scheme booklet or the website if the scheme has one. Failing both of those, ask the administrators (not sure if OH implies a husband or simply Other Half!).

Marcon

Early on this article has the comment: '....there's no guarantee you'll spend all the money in your pension pot by the time you die.'

DB pensions don't have 'pots', so it's clear this refers to DC arrangements. Mightn't it be clearer to have two entirely separate sections to this guide, one for DB and one for DC? There's a lot of valuable information there, but a novice reading it could get very confused - never difficult in the arcane world of pensions!

Sarahspangles

The hyperlinks at the top of the article are wrong, the first link refers to ‘defined benefit’ when it means ‘defined contribution’ and the second refers to ‘final salary’ when it means ‘defined benefit’.