Income tax when inheriting pension

pandapop90

Hi, new here so hope I’ve posted in right category.

My mom sadly passed away aged 65 (under the 75 threshold) the pension company are ready to release the funds but have strongly advised seeking financial advice before taking it as a lump sum due to income tax. However financial advice seems to be pricey. After hours of research I seem to have come to the conclusion as she passed before the age of 75 and it is under the 1.2million pound threshold and would be paid out less than 2 years after her death, that income tax would NOT be due on receipt of the funds and only on any subsequent income I earn from it whilst in savings.

Can anyone confirm that this is correct ???

thank you in advance

zagfles

Sorry for your loss.

Not sure where you get 1.2 million from, the lump sum death benefit allowance is £1,073,100 if she hadn't touched the pensions, if she has it'll be less. If you google LSDBA you'll get loads of articles explaining it (mostly aimed at advisors but quite readable). Something else to consider it setting up a beneficiaries drawdown pension which may be better as it leaves the money invested in a tax free wrapper and can be drawn tax free as needed.

QrizB

I think you're probably right re. income tax.

However, what are you going to do with a large lump sum? There's only so much you can stuff into ISAs and (as you note) you might end up paying tax on investment growth for the rest of it.

Is beneficiary drawdown an option?

dunstonh

It is tax-free. And it will remain tax-free whether you draw it now or later. If you retain it past age 75and then die, it becomes taxable. But if you die before 75, it'll pass to your beneficiaries, who can draw it tax-free. So, some tax planning is required to ensure you use the tax wrappers optimally

mrklaw

if they allow you to take it as a pension you basically end up with a cash ISA. the entire amount is tax free due to under 75, its protected from tax as its ‘in a pension’ but you don’t have to wait to access it.

unless there is a specific reason to, I’d try and avoid taking it as a lump sum

webmasterpolo

financial advice isn't expensive when it can easily save you thousands if not tens of thousands in tax planning alone, let alone actually plan and action your financial future for you and protect you from yourself (making stupid moves at the wrong time is common). Tons of research shows 2 to 3%pa better off after paying for advice, so basically it pays for itself and then some.

Don't cash it in now, leave it there, it's basically a giant ISA, enjoy the tax free returns and withdrawals, just be aware of the change at age 75 as dunstonh says.

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82003736#Comment_82003736

Research by financial advice firms probably! Just be careful, there's a lot of firms that try to rip off the recently bereaved like lawyers, even high street banks, charging ridiculous amounts to deal with stuff like probate, I expect some IFAs do as well. Typical IFA charges mentioned here are around 0.5% so you shouldn't pay more than that.

An easy quick search worth doing for any IFA is to see if they have any ombudsman decisions against them:

Ombudsman decisions – Financial Ombudsman service