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Pensions and inheritance tax rules

pensions & retirement

Pensions and inheritance tax rules

Find out who can inherit your private or state pension, and whether your pension will be subject to inheritance tax (IHT).

What happens to my pension when I die?

Most types of pension can be inherited when you die. Unlike property and cash savings, most modern pensions do not form part of your estate and are not subject to inheritance tax.

The amount of tax your beneficiaries have to pay will vary depending on the type of pension and your circumstances.

If you die before the age of 75, your remaining pension pot can usually be passed on tax-free. If you are 75 or older when you die, your beneficiaries have to pay income tax on the money they inherit.

With a defined contribution pension scheme (personal pensions and most workplace pensions), your beneficiaries have the choice to take your pension as a lump sum or by income instalments via drawdown.
 

Who inherits my pension?

This depends on the type of pension you have.

If you have a defined contribution pension, you can nominate who inherits your pension. It is possible to nominate just one person, multiple people or a charitable organisation as beneficiaries.

However, many salary-based defined benefit pension schemes can only be inherited by your dependants (a spouse, civil partner, children under 23 or someone else who is financially dependent on you).
 

How do I choose who inherits my pension?

The method of nominating a beneficiary will depend on your provider. Many providers allow you to nominate your beneficiaries online by completing an ‘expression of wishes’.
 

Will my beneficiaries pay inheritance tax on my pension?

Typically, your beneficiaries will not pay inheritance tax on your pension.
 

What happens to my SIPP when I die?

If you die before the age of 75, your SIPP can be inherited tax-free. If you die after turning 75, your beneficiaries will have to pay income tax on the money they inherit.

You can leave your SIPP to a person(s) or charitable organisation(s) of your choice. They will have the option to take your remaining pension either as a lump sum or via drawdown.

These rules also apply to most other types of defined contribution pension schemes.

 

What happens to my final salary pension when I die?

Unlike defined contribution pensions, a final salary defined benefit pension is not a finite pot of money. Therefore, you will not have a remaining pot of money to pass on when you die.

Depending on the terms of your pension, you may be able to leave some money for your family when you die. Many defined benefit pension schemes do have a provision for leaving money to a dependent (your spouse, civil partner or a child under 23). Some schemes may allow you to pass on money to someone else, but that money is likely to be subject to additional tax.

 

What happens to my annuity when I die?

Your annuity might continue providing for your family when you die. Whether or not it does depends on the terms of the annuity you bought.

Single life annuities tend to offer better rates while you are alive but stop paying out after you die.

Joint life annuities will continue to pay out to your spouse after you die, but stop when they die.

Some annuities have guarantees that ensure they will continue to pay out for a fixed number of years even if you die during that time period.

It is also possible to buy a value protected annuity. When you die, this type of annuity pays out any difference between your total received annuity payments and the amount you originally bought it for.

 

What happens to my state pension when I die?

If you reached the state pension age (currently 66) on or after 6 April 2016, your spouse may be able to inherit half of your weekly state pension. You cannot pass on any money from your state pension to another family member or any other beneficiary.

If you reached the state pension age before 6 April 2016, your spouse may be able to inherit more than 50% of your state pension.

Pensions and inheritance tax FAQs

Your pensions will not usually form part of your estate when you die.

However, it is worth noting that some older pension schemes may form part of your estate. Check with your provider, or seek financial advice, if you are unsure.

You can nominate a non-UK resident as the beneficiary of your pension. However, some schemes place restrictions on how non-UK residents can take the money. A non-UK resident may only be able to inherit your pension as a lump sum.

You can leave your pension to a trust.

If you die after the age of 75, your pension will be taxed at 45% if you leave it to a trust. You can leave it to a trust tax-free if you die before age 75.

You can choose a charity as the nominated beneficiary of your pension if it is a defined contribution pension scheme.

Get more from an ii SIPP

We don’t believe in charging a percentage fee that goes up as your investments grow.

Our award winning SIPP gives you fixed, transparent pricing, with no percentage-based fees. So you can watch your portfolio grow while your costs stay the same.

Open a SIPP and pay no SIPP fee for six months. Following the offer period, the ii SIPP fee is only £10 a month. Terms apply

The ii SIPP is aimed at clients who have sufficient knowledge and experience of investing to make their own investment decisions and want to actively manage their investments. A SIPP is not suitable for every investor. Other types of pensions may be more appropriate. The value of investments made within a SIPP can fall as well as rise and you may end up with a fund at retirement that’s worth less than you invested. You can normally only access the money from age 55 (age 57 from 2028). Prior to making any decision about the suitability of a SIPP, or transferring any existing pension plan(s) into a SIPP we recommend that you seek the advice of a suitably qualified financial adviser. Please note the tax treatment of these products depends on the individual circumstances of each customer and may be subject to change in future.