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

Marcon

onomatopoeia99 said:

Marcon said:

Tax_Slave said:

I was getting confused on this also.

As someone who will die prior to my 75th (unless a cure is found in next 5 years) and aged 62 I have a pension pot that is invested and untouched.
1) I take out 25% tax free - Die prior to 75 and wife inherits remaining 75% of pension pot tax free.
2) I leave 100% of pension pot untouched ,die prior to 75 and wife inherits entire pension pot tax free.

I presume both of above are correct assumptions?

3) you take tax free cash AND draw some taxable income from your pension, and die prior to age 75.

Under current legislation, your wife would inherit the whole of the whatever is in the pot tax free in any of the above scenarios.

Can you clarify that if the benficiary takes money out of the inherited pension pot, that would be subject to income tax in the normal way though?  It's only tax free at the point it's inherited but treated like any other SIPP thereafter?

Reason I ask is that I've been trying to figure this stuff our as well related to where the money in my own SIPP goes when I die.

It depends on the age at which you die. Under 75 and the pot is currently (a caveat I need to add!) inherited free of tax (provided that the SIPP trustees have discretion as to the ultimate recipients), and paid out free of tax.

Have a look on your SIPP providers website. If this information isn't there and clearly stated (and it sounds from your post that it isn't), you might encourage them to include it to help other people.

Linton

taxation of inherited pensions is described apparently comprehensively in: https://www.gov.uk/tax-on-pension-death-benefits.

onomatopoeia99

Marcon said:

onomatopoeia99 said:

Marcon said:

Tax_Slave said:

I was getting confused on this also.

As someone who will die prior to my 75th (unless a cure is found in next 5 years) and aged 62 I have a pension pot that is invested and untouched.
1) I take out 25% tax free - Die prior to 75 and wife inherits remaining 75% of pension pot tax free.
2) I leave 100% of pension pot untouched ,die prior to 75 and wife inherits entire pension pot tax free.

I presume both of above are correct assumptions?

3) you take tax free cash AND draw some taxable income from your pension, and die prior to age 75.

Under current legislation, your wife would inherit the whole of the whatever is in the pot tax free in any of the above scenarios.

Can you clarify that if the benficiary takes money out of the inherited pension pot, that would be subject to income tax in the normal way though?  It's only tax free at the point it's inherited but treated like any other SIPP thereafter?

Reason I ask is that I've been trying to figure this stuff our as well related to where the money in my own SIPP goes when I die.

It depends on the age at which you die. Under 75 and the pot is currently (a caveat I need to add!) inherited free of tax (provided that the SIPP trustees have discretion as to the ultimate recipients), and paid out free of tax.

Have a look on your SIPP providers website. If this information isn't there and clearly stated (and it sounds from your post that it isn't), you might encourage them to include it to help other people.

Thank you.  My SIPP provider says what you said now I've read it again, it was other guides from personal finance sites that I had found unclear.

It's pretty amazing to me that I pay no tax on it going in, and if I don't make it to 75 my nominees receive it completely free of any kind of tax, either inheritance tax or income tax.

dunstonh

It's pretty amazing to me that I pay no tax on it going in, and if I don't make it to 75 my nominees receive it completely free of any kind of tax, either inheritance tax or income tax.

There is a tax on the second death, though. If the initial beneficiary receives the pension, they can draw it out tax-free over their lifetime. However, whatever they do not draw out will be subject to income tax on any draws their beneficiary makes (above the usual allowances and in the appropriate income tax bands).

Aretnap

onomatopoeia99 said:

Marcon said:

onomatopoeia99 said:

Marcon said:

Tax_Slave said:

I was getting confused on this also.

As someone who will die prior to my 75th (unless a cure is found in next 5 years) and aged 62 I have a pension pot that is invested and untouched.
1) I take out 25% tax free - Die prior to 75 and wife inherits remaining 75% of pension pot tax free.
2) I leave 100% of pension pot untouched ,die prior to 75 and wife inherits entire pension pot tax free.

I presume both of above are correct assumptions?

3) you take tax free cash AND draw some taxable income from your pension, and die prior to age 75.

Under current legislation, your wife would inherit the whole of the whatever is in the pot tax free in any of the above scenarios.

Can you clarify that if the benficiary takes money out of the inherited pension pot, that would be subject to income tax in the normal way though?  It's only tax free at the point it's inherited but treated like any other SIPP thereafter?

Reason I ask is that I've been trying to figure this stuff our as well related to where the money in my own SIPP goes when I die.

It depends on the age at which you die. Under 75 and the pot is currently (a caveat I need to add!) inherited free of tax (provided that the SIPP trustees have discretion as to the ultimate recipients), and paid out free of tax.

Have a look on your SIPP providers website. If this information isn't there and clearly stated (and it sounds from your post that it isn't), you might encourage them to include it to help other people.

Thank you.  My SIPP provider says what you said now I've read it again, it was other guides from personal finance sites that I had found unclear.

It's pretty amazing to me that I pay no tax on it going in, and if I don't make it to 75 my nominees receive it completely free of any kind of tax, either inheritance tax or income tax.

Indeed, it's a very generous tax break that allows large amounts of money to be accumulated and passed on without ever being subjected to tax in petty much any form. (Potentially unlimited amounts, now that the lifetime allowance has been abolished).

Arguably it's too generous, so you should probably be prepared for the possibility that the new government might change things in the near future. What sort of changes might be made are pure speculation at this point, but the most obvious and simplest one would be to bring it into line with what happens if you die after 75, ie withdrawals would become subject to income tax.

zagfles

Aretnap said:

onomatopoeia99 said:

Marcon said:

onomatopoeia99 said:

Marcon said:

Tax_Slave said:

I was getting confused on this also.

As someone who will die prior to my 75th (unless a cure is found in next 5 years) and aged 62 I have a pension pot that is invested and untouched.
1) I take out 25% tax free - Die prior to 75 and wife inherits remaining 75% of pension pot tax free.
2) I leave 100% of pension pot untouched ,die prior to 75 and wife inherits entire pension pot tax free.

I presume both of above are correct assumptions?

3) you take tax free cash AND draw some taxable income from your pension, and die prior to age 75.

Under current legislation, your wife would inherit the whole of the whatever is in the pot tax free in any of the above scenarios.

Can you clarify that if the benficiary takes money out of the inherited pension pot, that would be subject to income tax in the normal way though?  It's only tax free at the point it's inherited but treated like any other SIPP thereafter?

Reason I ask is that I've been trying to figure this stuff our as well related to where the money in my own SIPP goes when I die.

It depends on the age at which you die. Under 75 and the pot is currently (a caveat I need to add!) inherited free of tax (provided that the SIPP trustees have discretion as to the ultimate recipients), and paid out free of tax.

Have a look on your SIPP providers website. If this information isn't there and clearly stated (and it sounds from your post that it isn't), you might encourage them to include it to help other people.

Thank you.  My SIPP provider says what you said now I've read it again, it was other guides from personal finance sites that I had found unclear.

It's pretty amazing to me that I pay no tax on it going in, and if I don't make it to 75 my nominees receive it completely free of any kind of tax, either inheritance tax or income tax.

Indeed, it's a very generous tax break that allows large amounts of money to be accumulated and passed on without ever being subjected to tax in petty much any form. (Potentially unlimited amounts, now that the lifetime allowance has been abolished).

Arguably it's too generous, so you should probably be prepared for the possibility that the new government might change things in the near future. What sort of changes might be made are pure speculation at this point, but the most obvious and simplest one would be to bring it into line with what happens if you die after 75, ie withdrawals would become subject to income tax.

It's hardly unlimited, the amount going in tax free is limited by the annual allowance, the tax relief limit, and the AA taper for very high earners. It's only coming out tax free if you die under 75, which most people can't know, and those who do (eg terminally ill) HMRC can investigate and apply IHT to large pension conts shortly before death if they think it was a tax dodge. 

But it does seem very odd that beneficiary drawdown under 75 is still tax free, given the LSDBA allows beneficiaries to take over a million tax free lump sum on death under 75 if they haven't touched their pensions. I think the initial rules didn't allow inherited drawdown pensions at all, the lump sum was it. 

george4064

Upon inheriting a DC Money Purchase pension pot, where the original owner died aged above 75. Is the nominated beneficiary able to make withdrawals via drawdown even if they’re say aged under 50?

If so, isn’t the tax situation a bit of a mess if they’re still working and receiving a salary?

Also, can the beneficiary withdraw 25% of the inherited pot tax free and pay the rest at their marginal rate? Or is it all at their marginal rate?

dunstonh

Upon inheriting a DC Money Purchase pension pot, where the original owner died aged above 75. Is the nominated beneficiary able to make withdrawals via drawdown even if they’re say aged under 50?

Inherited pensions can be accessed with no minimum age for the beneficiary(ies).

If so, isn’t the tax situation a bit of a mess if they’re still working and receiving a salary?

Not really.  Lots of people have multiple PAYE income.    The system is in place to handle it.   Although it will never be as clean as a single payroll.

Also, can the beneficiary withdraw 25% of the inherited pot tax free and pay the rest at their marginal rate? Or is it all at their marginal rate?

There is no 25%TFC on inherited pensions.  Even if the TFC was not taken by the original owner.   It effectively becomes a 100% crystallised pension but with a dependents pension marker to prevent it from being consolidated with crystallised pensions.

george4064

Thank you @dunstonh for the detailed reply, as always.

relishthechallenge

Under the new IHT rules, the beneficiary of a Defined Contribution pension pot will pay income tax at their nominal rate on drawing down the balance after IHT is deducted.

However, if the beneficiary is not a UK taxpayer, will they still have to pay UK tax?