What will happen to my pension pot after I die?

7 April 2016

Q

I am confused by the new rules regarding passing pensions on after death. My wife and I both have pensions worth more than £1 million, which are in drawdown. As we are unlikely to use much of our pension savings during our lifetime, will our pension pots that are handed down to our children become part of their lifetime allowance after we die?

Also, once our pension pots are assigned to a child, are they subject to the normal pension rules?

From
PD/Sway

A

If your pension funds go to each other first, a child would be a ‘successor’ of the surviving spouse.

The Lifetime Allowance only applies to the person accumulating the fund, not to a successor.

The child, therefore, inherits a drawdown fund which has already been tested against the lifetime allowance, and it does not affect their own allowance.

They can take the benefits immediately as ‘flexi-access drawdown’ without waiting until they are 55.

 

This means they could take the pension as a lump sum and spend it as they wish; continue drawing down an income; buy a lifetime annuity; or leave the funds invested.

If you – as the original owner of the pension fund – die before you are 75, all these options are paid tax-free. But if you die after 75, the income is taxable at the beneficiary’s marginal tax rate.

Pensions are typically held in trust outside your estate and so are free of inheritance tax in most cases.