Passing your pension on to your Dependants
Passing your Pension on to your Dependants
What has Changed
Previously, it was normally only possible to pass a pension on to your dependants as a tax-free lump sum if you died before age 75 and you had not taken any tax-free cash or income. Otherwise, any lump sum paid from the fund was subject to a 55% tax charge. This tax charge was abolished on 6 April 2015. The tax treatment of any defined contribution pension you pass on, which you do not use to purchase a lifetime annuity or scheme pension, will depend on your age when you die. If you die before age 75, your beneficiaries can usually take the whole pension fund as a tax-free lump sum or draw an income from it, also free of UK income tax, either by choosing to buy an annuity or by using drawdown.
If you die after age 75, your beneficiaries have three options:
a. Take the whole fund as cash in one go: the pension fund will be subject to 45% tax. However, it has been proposed this should be taxed as your beneficiary’s or beneficiaries’ income for payments made after 5 April
b. Take a regular income through an annuity or drawdown: the payments will be taxed as your beneficiary’s or beneficiaries’ income.
c. Take periodical lump sums through drawdown: the lump-sum payments will be taxed as your beneficiary’s or beneficiaries’ income.
Who is Affected
Anybody who has a defined contribution pension – e.g. individual or group personal or stakeholder pensions, Self Invested Personal Pensions, Additional Voluntary Contribution schemes, etc. is affected.
A recent Guardian article by Holly Thomas entitled Pass it on: how to leave your pension to someone else contains some great tips as well as some key dates to be aware of, to ensure you stay within the rules.