Your pension is free from inheritance tax. Pass it on!

The only two certainties in life are death and taxes, so the saying goes. And until very recently the government’s tax on any pension savings you might want to pass on when you die was astronomical. At an already very difficult time, many beneficiaries were being hit with a whopping 55% tax bill. Thankfully, things have changed.

You now have more options than ever before when it comes to passing on your remaining pension money. And the way it’s taxed is a lot fairer than it used to be. If you’re thinking about what to do with your pension, then this quick and easy guide is for you.

What are the tax laws now?

If you are under 75 when you die, then in most cases the pension benefits you pass on will not be taxed at all. If you are over 75 then any money the recipient takes out of the pension they have inherited will be added to their earnings for the year and taxed as income. Depending on their income bracket, the government could take 20%, 40% or 45%. If they don’t take any money out of the pension they won’t pay any tax on it. Always remember: tax depends on someone’s individual circumstances and is subject to change.

Can I leave my pension to whoever I choose?

It depends on what type of pension you have. If you have a private pension (also known as defined contribution schemes) then you can leave whatever is left in your pot to whoever you like. If you have a final salary pension (also known as defined benefit schemes) then there are usually restrictions around who can receive your pension benefits when you die.

What about government pension schemes?

Government pensions are generally final salary schemes that promise to pay you a guaranteed income for life. The specific rules and restrictions depend on what type of scheme you have. In most cases, though, you can choose to pass on your pension benefits when you die and the recipient will pay income tax on the money they receive. If you are allowed to pass your pension on as a lump sum and you are under 75 when you die, there is usually no tax for the recipient to pay.

What happens if I buy an annuity? Can I pass this on?

If you buy an annuity it generally means you have sold some or all of your pension pot to an insurance company in exchange for a guaranteed income for life. You can choose an annuity that transfers some or all of this income to someone when you die. Again, there will be restrictions.

Does it matter if I’ve already taken money out of my pension?

Not at all. Let’s say you’ve got a private pension and take your tax-free cash allowance at 55 (not something you should do unless you’ve checked to see if it’s the right decision for you). You then take lump sums from your pension until you die. You can leave whatever is left in your pot to anyone you choose to. This includes more than one person, or one or more organisations, if that is what you want to do.

Deciding what to do with your pension doesn’t have to be taxing

Is there anything else I need to know?

When it comes to passing on your pension when you die the take-away nugget is this: the tax man generally gets less than he used to get, which is always good news.

As is often the case with pensions, though, there are ‘ifs’, ‘buts’ and ‘maybes’. The options you have when it comes to leaving your pension as a legacy really depend on the type of pension you have, where you are at in life and where you want to be. And understanding these options and the implications for you is not always straightforward. This is where we can help.

Claim your free guide to personal pensions

Pension Information GuideTo get an idea of the type of pension you have download Your guide to personal pensions. This simple overview covers the basic features of the most common types of pension and looks at why you might think about switching to a modern private pension scheme – including having more flexibility around what happens to your pension when you die.

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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:

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