What happens to my pension pots when my family inherit them?
12 February 2021
Question by Paul
Inherited Pension Pots
What are the tax rules for a pension pot that's inherited for a second and third generation?
I know the first time it's dependant on the death being pre or post 75 years of age but then what's taxed after this as I would like to create a perpetual pension for my pension pot.
Answered by Chelsea Dennison
In short, the same rules apply.
The tax treatment of pensions depends on whether death occurs before or after 75 and this not only applies to the nominated beneficiary who inherits the pension first, but any successors who may inherit the same pension pot thereafter. This can continue indefinitely under current legislation.
As a reminder, if the death of the pension holder occurs before 75, the pension will be inherited by a successor inheritance tax free (IHT) and any withdrawals will be income tax free. If death occurs post 75, the pension remains IHT free but any withdrawals will be taxed at the successor’s marginal rate. These tax rules apply as long as the funds remain with the pension wrapper. Funds can be withdrawn from a pension by taking regular withdrawals, taking a lump sum or by purchasing an annuity.
Senior Financial Planner
I studied Mathematics at The University of Manchester and achieved a 2:1 in June 2015. After graduating, I moved to Paris for a year where I was an Au Pair and attend language school to improve my French to a conversational level. When I returned home in August 2016, I worked at L&G retirements before I started my career in Financial Planning on the PN grad scheme in July 2017. I passed my Diploma in just 10 months whilst working full time and in September last year gained all the credits needed for the Advanced Diploma (not quite enough experience for Chartered but watch this space!).