inheriting a pension fund

The government's Pension Wise service can help. If you find yourself inheriting pension wealth, what are your options? This article However you decide to re-invest your money, be aware of investment scams. You may have to pay a lifetime allowance tax charge. This is Money columnist Steve Webb explains the 75th birthday tax rule on bequeathing pension funds. The situation is slightly different, as any income withdrawn from the pension pot will be taxed as earned income for you. The person who died will usually have nominated you (told their pension provider to give you money from their pension pot). We are no longer accepting comments on this article. All content is available under the Open Government Licence v3.0, except where otherwise stated, National restrictions in England from 5 November, different rules on inheriting the State Pension, Coronavirus (COVID-19): guidance and support, Transparency and freedom of information releases, age of the pension pot’s owner when they died, you’re paid more than 2 years after the pension provider is told of the death, they had pension savings worth more than £1,073,100 (the, they died before 3 December 2014 and you buy an annuity from the pot, an annuity or drawdown fund from an ‘untouched’ pot (the person who died did not take any money from it). If you buy an annuity from the pot, the provider takes Income Tax off payments before you get them. Paying in lump sums and/or regular contributions can be a great way of boosting the value of your pension, and therefore income at retirement. HM Revenue and Customs (HMRC) will send you a bill, after they’re told about the payment by the person dealing with the estate of the person who died. David Smith, director of financial planning at Tilney Bestinvest, replies: In relation to your question, I am assuming that you have inherited the pension as a pension policy, rather than inheriting a lump sum payment from your relative’s pension pot. This applies to personal representatives and beneficiaries of registered pension scheme members who had unused pension funds at the time of their death. The rules on inheriting a pension therefore depend on what type it is and how old the holder was when they died. You can change your cookie settings at any time. Furthermore, there are no minimum or maximum amounts of income that have to be taken from this pension and you simply choose to access income as and when it is required. What are the rules? The pension you have inherited will normally be available as a tax-free pension. We asked a pensions expert to explain the tax and other implications of being left a pension pot. Alternatively, you could opt to use the pension pot like a savings account and draw income or lump sums when required and there will be no requirement for you to draw a guaranteed income from an annuity, as you will have complete flexibility available to you. It is up you as the beneficiary to ensure the pension is designated within two years, but most providers act fairly swiftly once a death certificate has been received and designate it within four to six weeks. But sometimes the provider can pay the money to someone else, for example if the nominated person cannot be found or has died. get back What you have received is known as a survivor’s pension and these are typically paid via: Buy an annuity: This means purchasing an insurance product that provides a guaranteed income until you die - there's no chance of running out of money altogether. You have complete flexibility available to you. From how to access your account online, scam awareness, your The urge to splurge: Stuck at home, many have saved a fortune... but is it time for some 'comfort spending' to balance out the saving? New state pension age: when will you retire. Published: 19:41 AEDT, 26 March 2016 | Updated: 19:41 AEDT, 26 March 2016. This rule is due to be removed later this year, allowing such dependants to continue to receive income for as long as it lasts, however you should bear in mind that the government can and do change pension rules. Some links in this article may be affiliate links. The views expressed in the contents above are those of our users and do not necessarily reflect the views of MailOnline. Important: Drawdown is a higher risk option than an annuity - income is not secure and the value of investments can fall as well as rise. Scams tend to be carried out by firms which are not FCA (Financial Conduct Authority)-regulated and warning signs include cold calling or texting, the promise of unique or unusual opportunities offering quick, easy profits or something which seems too good to be true. Desperate borrowers face mounting credit card bills: Surge in people turning to sub-prime plastic charging interest of 35% and beyond. Including: We look at some common pitfalls when choosing an adviser and explain how our approach can help avoid them. This tax year you can invest up to £15,240 tax free (it has been announced this will rise to £20,000 for the tax year 2017/18). Cash machine dash in the days before new lockdown... will coronavirus continue to kill off physical money? Under the current rules a beneficiary inheriting a pension fund can usually access the money in that plan free of income tax and inheritance tax if the plan-holder dies before their 75th birthday and there was no transfer in poor health in the two years before death. If you choose to invest the value of your investment will rise and fall, so you could As you consider what to do with the money you’ve inherited from an IRA Once held in a pension money is not usually accessible until age 55 (57 from 2028). If you fill in a Self Assessment tax return each year, you’ll get a refund when you’ve sent your return. However, if you are classed as a certain type of dependant at the time you inherit the pension (you’re a child of the original policyholder and under age 23), income from the annuity or drawdown plan will cease once you reach age 23. Growth was the only game in town but the vaccine rally hints at a switch, says SIMON LAMBERT, 'Covid-19, Brexit, job losses and stamp duty holiday end all pose a threat': Property experts think the writing is already on the wall for the 'mini-boom'. Thousands of families are wrongly denied help with care costs: How to mount a successful fight for this vital cash support. If your relative died before their 75th birthday. We do not write articles to promote products. Tanya Jefferies, of This is Money, replies: Pension freedom reforms last year included the abolition of a hated 55 per cent 'death tax' on annuities and income drawdown plans left to relatives. Not from Halifax! Pension wealth can be passed on tax-efficiently from your loved ones. 25% if you get any other type of payment, for example pensions, annuities or money from a drawdown fund The amount you pay may change if someone else starts to get payments from the same pot. Find out more about transferring your drawdown pension to Hargreaves Lansdown. Pensions versus Lifetime Isas: How does new savings offer... Will you be allowed to retire early on a lower state... One-fifth of over-50s have never properly checked their... David Smith, director of financial planning at Tilney Bestinvest, replies: WHAT IS AN ANNUITY AND WHAT IS INCOME DRAWDOWN, Porsche has given the iconic Panamera a mid-life refresh, Volkswagen reveal the first electric SUV ID 3 and 4 range, Land Rover Defender 90 in the British woodlands, Blue Whale manager: Facebook is good value but not Tesla, The Shelby SuperCar Tuatara is the world's fastest road car, Bugatti shows off its new Bolide track car in impressive footage, New £250,000 Ghost 'most technically advanced' Rolls-Royce ever, Kar-go Delivery Bot: UK's first autonomous electric delivery vehicle, UK's first autonomous electric delivery vehicle revealed, SF90 Spider: Ferrari's first hybrid-powered convertible supercar. If you click on them we may earn a small commission. could get This is Money is part of the Daily Mail, Mail on Sunday & Metro media group, Get a discount code to save on your internet security, Listen to podcasts and books for less with these offers, Get the ultimate broadband and entertainment bundle, Get great deals on existing and new plans, Have a clean house and save money with these offers, Can I run an electric car cable across the pavement and could people claim if they trip? However, the changes do not affect people with final salary pensions, normally considered the best and most generous schemes. This article is not personal advice. One way to do this is through a pension. If you find yourself on the receiving end of such an inheritance what are your options? Annuities used to be the main way people funded retirement, but they are now regarded as poor value and restrictive. Hargreaves Lansdown is not responsible for an ASK TONY: A little extra help with my financial affairs so I can get groceries in lockdown? Before transferring you should ensure you will not be subject to excessive exit fees, or lose out on valuable guarantees or benefits. wellbeing and our community we're For example, invest £800, and the government automatically adds £200 (20%) increasing your total contribution to £1,000. You do not usually pay Inheritance Tax on a lump sum because payment is usually ‘discretionary’ - this means the pension provider can choose whether to pay it to you. Whether it is designated within this time or not, if the value of your relative’s total pension funds exceeded their available lifetime allowance - £1.25million up to 5 April 2016, and £1million in the next tax year - then a tax charge of 55 per cent could have been deducted from anything over this sum in the pension pot you have inherited. Our website offers information about investing and saving, but not personal advice. Whether you pay tax usually depends on the: You may also have to pay tax if the pension pot’s owner was under 75 when they died and any of the following apply: You pay tax if the pot’s owner was under 75, and it’s more than 2 years after the provider is told of their death when you get either: In both cases, the provider will deduct Income Tax before you’re paid. If you’re not sure whether an investment is right for you You can buy an annuity, which provides a guaranteed income for life, by shopping around on the open market. You may have to pay tax on payments you get from someone else’s pension pot after they die. We do not allow any commercial relationship to affect our editorial independence.