Is it possible for them to put all of their earnings in that tax year into their pension so they have full advantage of the nominal rate bands against the sum received from the deceased persons pension?
16 February 2022
Question by Ron
If you pass on your pension to your son on your death they will be taxed on receiving that sum at nominal tax band rate. Is it possible for them to put all of their earnings in that tax year into their pension so they have full advantage of the nominal rate bands against the sum received from the deceased persons pension? Would this money be paid from the pension investor free of tax so the receiver would then make the tax payment?
Answered by Boring Money
This is an 'it depends' answer. It depends upon a couple of things: your age on death and whether they receive the pension fund as a lump sum payment or elect to maintain the pension fund.
For the latter, if they maintain the pension fund there is no tax to pay on receipt. As and when they elect to draw the income it will be liable to income tax. The rate of income tax will depend upon the total income received from all sources in that tax year.
The relevance to your age on death is that if you die before age 75, your son can receive the fund as a lump sum or drawdown without any tax liability. Once you reach age 75 any lump sum payments will be treated as taxable income and, as you suggest, your son will be taxed accordingly based on his total income received in the year of receipt.
Depending upon his other pension contributions in a year, he could use the pension fund lump sum to make a pension payment of up to 100% of this earnings. However, in that situation, he may as well have kept the inherited pension in situ.
Another important point to make is whether your pension has the flexibility to pay benefits via drawdown. Despite it being legally possible it is not a requirement of the scheme to provide flexible drawdown on death so the only option may be to receive the fund as a taxable lump sum or use it to purchase an annuity.
I hope this answers your question.