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Tax on inherited private pensions

15 February 2024

Inheriting private pensions involves grasping tax implications, nominations, and rules, considering the owner's age and limitations for defined benefit pots. Managing it requires awareness of complexities and adherence to time limits.

Private pensions facilitate efficient wealth transfer, but it’s crucial to assess potential tax liabilities on an inherited private pension. The deceased usually nominates the heir for remaining pension funds with the provider. If the nominated person cannot be located or has passed away, the pension provider may make payments to an alternative recipient.

In the instance the owner of a private pension dies before age 75, you can generally receive the benefits as a tax-free lump sum or drawdown income. If the deceased passed away after age 75, your marginal income tax rate will apply—20% for basic rate, 40% for higher rate, and 45% for top-rate taxpayers. Scottish taxpayers may encounter different rates.

Inherited private pensions from a defined benefit pot, typically workplace pensions, have limitations. Generally, they can only be paid to a dependant of the deceased, like a spouse, civil partner, or child under 23. The pension fund may allow changes to this rule, but any inheritance may be subject to up to 55% tax as an unauthorised payment.

Inheriting a pension involves complex rules, varying based on the pension type and the holder’s age at death. Adherence to crucial time limits is also necessary.

Source: HM Revenue & Customs Mon, 12 Feb 2024 00:00:00 +0100

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