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

Marcon

'With defined contribution pensions, once you're able to access the cash (currently at age 55, though this is rising to 57 from April 2028), you can usually take it either as one lump sum, as multiple smaller payments (known as 'drawdown'), or as a combination of both.'

How can you combine taking it (all) as one lump sum AND multiple smaller payments?

MSE_Kit

Thanks for all the feedback so far, I appreciate it. Do let me know any other feedback you've got.

Marcon

'This is where you put in money to build up a pension savings 'pot' – for example from your salary or other income.'

This often causes confusion. Using the phrase 'other income' suggests that things like interest, dividends or a pension already in payment can be used to support tax-relievable contributions. They can't - you need to have 'relevant earnings', otherwise you are limited to a maximum of £3,600 gross (you pay in £2,880 and the provider claims a tax top up at basic rate). You also need to be under 75 when the contribution is made.

Marcon

'f you've bought a 'single-life' annuity, this will stop paying out once you die, even if it hasn't paid out the equivalent of what you bought it for. This means there's unlikely to be anything to pass on when you die.

If you've bought a 'joint life annuity' or an annuity with a 'guaranteed period', these will continue to pay out after your death to whoever else is named on the annuity (for example, a spouse). However they are generally more expensive to buy than 'single-life' annuities – meaning you'll get a lower monthly payment for the same size pension pot.'

Quite muddled wording - not immediately obvious, especially to a novice, that you could have:

• a single life annuity
• a single life annuity with a guarantee period
• a joint life annuity
• a joint life annuity with a guarantee period

MSE_Kit

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.

On the unauthorised payment point, see the Gov.uk website.

Kit

Marcon

MSE_Kit 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.

On the unauthorised payment point, see the Gov.uk website.

Kit

Thanks Kit. I've had a look and noted the following:

'A pension from a defined benefit pot can usually only be paid to a dependant of the person who died, for example a husband, wife, civil partner or child under 23. It can sometimes be paid to someone else if the pension scheme’s rules allow it - but it will be taxed at up to 55% as an unauthorised payment.'

That statement is not wholly correct - no such thing as a defined benefit pot, for starters, so hardly the most promising opener for ten. I appreciate it cannot be totally comprehensive, but it unhelpfully fails to mention DB schemes where the rules provide for discretionary pensions for unmarried partners where the qualification is only 'interdependency', 'living in a relationship akin to marriage' or in some cases simply 'co-habiting'. It is also possible to pay a pension to (say) a disabled relative without this being an 'unauthorised payment' - for example a child over the age of 23 would be eligible if the rules simply said there had to be some sort of 'dependency' (which need not be financial).

It's also got those splendid weasel words 'usually' and 'sometimes' - not exactly predictors of how the law will be applied!

I've never come across a scheme where the trustees agreed to pay a pension which would be classed as an 'unauthorised payment'. I appreciate that there may be cases where this would be so, but might I respectfully suggest toning down the wording in your guide to reflect the fact that there's very little chance the trustees would agree to such a step, and to avoid alarming those who might think they fall into this 'taxable trap' scenario?

Out of interest, I wonder if any of the administrators posting on this forum have ever seen trustees do anything so unlikely?

MSE_Kit

Marcon said:

'f you've bought a 'single-life' annuity, this will stop paying out once you die, even if it hasn't paid out the equivalent of what you bought it for. This means there's unlikely to be anything to pass on when you die.

If you've bought a 'joint life annuity' or an annuity with a 'guaranteed period', these will continue to pay out after your death to whoever else is named on the annuity (for example, a spouse). However they are generally more expensive to buy than 'single-life' annuities – meaning you'll get a lower monthly payment for the same size pension pot.'

Quite muddled wording - not immediately obvious, especially to a novice, that you could have:

• a single life annuity
• a single life annuity with a guarantee period
• a joint life annuity
• a joint life annuity with a guarantee period

Have now tried to make this point a bit clearer (and refer to all types of annuity).

MSE_Kit

Marcon said:

MSE_Kit 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.

On the unauthorised payment point, see the Gov.uk website.

Kit

Thanks Kit. I've had a look and noted the following:

'A pension from a defined benefit pot can usually only be paid to a dependant of the person who died, for example a husband, wife, civil partner or child under 23. It can sometimes be paid to someone else if the pension scheme’s rules allow it - but it will be taxed at up to 55% as an unauthorised payment.'

That statement is not wholly correct - no such thing as a defined benefit pot, for starters, so hardly the most promising opener for ten. I appreciate it cannot be totally comprehensive, but it unhelpfully fails to mention DB schemes where the rules provide for discretionary pensions for unmarried partners where the qualification is only 'interdependency', 'living in a relationship akin to marriage' or in some cases simply 'co-habiting'. It is also possible to pay a pension to (say) a disabled relative without this being an 'unauthorised payment' - for example a child over the age of 23 would be eligible if the rules simply said there had to be some sort of 'dependency' (which need not be financial).

It's also got those splendid weasel words 'usually' and 'sometimes' - not exactly predictors of how the law will be applied!

I've never come across a scheme where the trustees agreed to pay a pension which would be classed as an 'unauthorised payment'. I appreciate that there may be cases where this would be so, but might I respectfully suggest toning down the wording in your guide to reflect the fact that there's very little chance the trustees would agree to such a step, and to avoid alarming those who might think they fall into this 'taxable trap' scenario?

Out of interest, I wonder if any of the administrators posting on this forum have ever seen trustees do anything so unlikely?

Have now tried to tone down the risk of paying this 'unauthorised 55% charge'.

pwe

Hello everyone 

I listened last week to Martin’s podcast about pensions
In it, he was in discussion with Charlotte Jackson from the Money & Pension Service.

At one point she mentioned something concerning inheriting a DC pension, relating to taxation, which was contrary to my (and others’) understanding 

She said that if the deceased person had accessed their pension before they died, the person inheriting the pension would be liable to pay tax when they withdrew cash from it (regardless of the age of the deceased) 

Prior to hearing this, I had not realised about the ‘previously accessed’ point, and digging around on the .gov website, I can’t find anything that confirms the point that Charlotte made. 

I’ve emailed the MPS to seek confirmation/clarification, but have had no reply 

I’d be grateful if anyone here is able to offer any thoughts 

Marcon

pwe said:

Hello everyone 

I listened last week to Martin’s podcast about pensions
In it, he was in discussion with Charlotte Jackson from the Money & Pension Service.

At one point she mentioned something concerning inheriting a DC pension, relating to taxation, which was contrary to my (and others’) understanding 

She said that if the deceased person had accessed their pension before they died, the person inheriting the pension would be liable to pay tax when they withdrew cash from it (regardless of the age of the deceased) 

Prior to hearing this, I had not realised about the ‘previously accessed’ point, and digging around on the .gov website, I can’t find anything that confirms the point that Charlotte made. 

I’ve emailed the MPS to seek confirmation/clarification, but have had no reply 

I’d be grateful if anyone here is able to offer any thoughts 

I suspect you can't give a link as you are a relatively new poster, but please could you give a rough time of when in the podcast this was said - it would be helpful to hear the context.