How to pass on your pension pot to loved ones

As the saying goes, the only two certainties in life are death and taxes. Until very recently the government’s tax on inherited pension savings was astronomical (up to 55 per cent) but thankfully things have changed.

We now have more options than ever before when it comes to passing on remaining pension money, and the tax payable is far fairer. Here's what you need to know.

What are the tax laws now?

  • If you are aged under 75 when you die, then in most cases the pension benefits you pass on would not be taxed at all.
  • If you are over 75 then any money the recipient takes out of the inherited pension will be added to their earnings for the year and taxed as income (the percentage varies depending on their income bracket). If no money is drawn from the pension, then no tax is paid.

Always remember: tax depends on 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 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 would 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 you take your tax-free cash allowance at 55. You then take lump sums from your pension until you die. You can leave whatever is left in your pot to anyone you choose. This includes more than one person, or one or more organisations, if that is what you want to do.

When it comes to passing on your pension the key take-away is that the taxman now typically gets less than he used to.

As is often the case with pensions, though, there are ‘ifs’, ‘buts’ and ‘maybes’. The options you have really depend on the type of pension you have, where you are at in life and where you want to be.

Understanding these options and the implications for you is not always straightforward so seek expert advice about your individual circumstances and options to be absolutely clear.

Thanks to Jamie Smith-Thompson at pension advice specialist Portafina