Inheritance of Pension funds

se2020

Adult children stand to inherit some funds from a deceased parents pension. 

Parent was over 75.

My understanding is,
The pension does not form part of the deceased estate for IHT.
The children pay income tax on the funds recived at the corresponding tax rates. (These vary from 20%to 40%)

Can the children avoid paying this tax?
Legitimate ways obviously. 

If the children do not have any form of existing pension could they have the funds transfered directly into a new pension to matain tax free status?

If they already have a workplace pension could funds be transferred into that?

The options offered by the pension provider seem to suggest the funds can be paid out as a lump sum or paid in smaller amounts over an (unmentioned length) timeframe.
Could the 40% rate payers leave the funds unclaimed until they retire themselves (20yrs?) and only withdraw when they drop to a lower tax rate?

Or, could they claim the funds, pay the relevant tax, then pay the full amount into a new pension claiming the equivalent relief?
Ie  in the case of the 40% payer it would make sense to do that now while they are still in the 40% bracket.

I am aware that from 2027 pensions may well form part of the estate for IHT. Will that happen to any unclaimed funds in this case or not as the death was in 2025?

Thanks!

SadCodeMan

I think their ability to keep the money within the wrapper will depend on what the scheme offers.

I think there is no reason why they could not take sums from the scheme and reinvest it in their own one though.
It looks from the below link as if this does not trigger recycling or MPAA restrictions

https://techzone.aberdeenadviser.com/public/pensions/tech-guide-recycle-tax-free-cash#:~:text=Pension income recycling,-Individuals can recycle&text=But there's an additional restriction,flexibly without triggering the MPAA.

They would need to have sufficient relevant earnings to cover what they were going to invest though I think. But, if they aer 40% payers and this is from earnings then I am guessing this wont be an issue.

It will, of course, limit the other payments they might have been making so the total does not go above 60K (current).

This would have the additional restriction that the new pension would only be available to them after the age of 57 though (or whatever that becomes) rather than being able to access now so something to think about.

Given the 2027 changes, if they are not already fully using ISAs it might just possibly be sensible to use those to the max? Even if that was just a holding pen to keep the taxed money before investing larger lump sums into pension closer to the time? If they were still higher tax payers, other than the investment limits, the result would be the same but the flexibility could be greater.

All this may change at the end of the month... and future years...

You can never say never about what might change in the future (2027 for example) but I would be absolutely stunned if they made a retrospective IHT charge for someone who had already died. That would cause such a stink I don't think they would be able to do it (or would want to try).

Keep_pedalling

se2020 said:

Adult children stand to inherit some funds from a deceased parents pension. 

Parent was over 75.

My understanding is,
The pension does not form part of the deceased estate for IHT.
The children pay income tax on the funds recived at the corresponding tax rates. (These vary from 20%to 40%)

Can the children avoid paying this tax?
Legitimate ways obviously. 

If the children do not have any form of existing pension could they have the funds transfered directly into a new pension to matain tax free status?

They could do, it will still be subject to tax when the money is drawn down and bossible be subject to IHT on their own estates if they don’t use it before they die.

If they already have a workplace pension could funds be transferred into that?

Depends on the rules of the scheme but unlikely. 

The options offered by the pension provider seem to suggest the funds can be paid out as a lump sum or paid in smaller amounts over an (unmentioned length) timeframe.
Could the 40% rate payers leave the funds unclaimed until they retire themselves (20yrs?) and only withdraw when they drop to a lower tax rate?

Again this depends on the rules of  pension scheme of the deceased but that is unlikely to be an option.

Or, could they claim the funds, pay the relevant tax, then pay the full amount into a new pension claiming the equivalent relief?
Ie  in the case of the 40% payer it would make sense to do that now while they are still in the 40% bracket.

The amount you can pay into a pension limited by how much income you have. For instance if you were unemployed you are limited to paying in £2880 pa.

I am aware that from 2027 pensions may well form part of the estate for IHT. Will that happen to any unclaimed funds in this case or not as the death was in 2025?

Thanks!

Changes to IHT rules only effect estates where the deceased died after the implementation of the new rules.