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Planning to pass on your money or property
Giving money and property to your children and grandchildren
An introduction to UK family trusts
Tax on a pension you pass on or inherit
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Tax on a pension you pass on or inherit

Tax on a pension you pass on or inherit

If you want to include a pension in your will, or if you get a pension from someone who has died, there may or may not be tax to pay, depending on the individual circumstances and the type of pension/s involved.

Death Benefits from a State Pension

Your basic State Pension is paid only to you, and can't normally be passed on to someone else when you die. However, if you chose to put off receiving your State Pension when you reached State Pension age (deferral), your partner or family may be entitled to some of your State Pension benefits.

If you have contributed towards an additional State Pension - formerly known as the State Earnings-Related Pension Scheme (SERPS) or State Second Pension and you die, your spouse or civil partner can get some of this additional pension.

What happens to your State Pension when you die - Directgov website

Tax if you pass on the State Pension/Additional State Pension

There are no Inheritance Tax consequences of passing on a State Pension or additional State Pension (formerly SERPS).

Tax on death benefits received from the State Pension/additional State Pension

Any pension income that you get from someone who has died will be calculated as part of your taxable income in retirement.

Do you have to pay tax in retirement?

Taxable and non-taxable income at a glance

Do you need to complete a tax return?

Death benefits from a company, personal or stakeholder pension

Depending on your pension rules, a number of benefits may be payable when you die, including:

a return of your contributions
a lump sum
a pension for your spouse, civil partner or another dependant

If a lump sum is payable and you don't nominate someone to get it when you die it falls into your estate and will be liable to Inheritance Tax. Other tax liabilities are summarised below.

Tax on death benefits from a company pension

If you die before starting to draw your company pension

Most company pensions provide for a 'Death-in-Service' benefit, similar to a life assurance policy. This means that if you die before starting to draw your company pension a lump sum is paid to a chosen person (known as the 'beneficiary').

The money can be paid free of Income Tax if it does not exceed the pension holder's available 'Lifetime Allowance' (£1.65 million in tax year 2008-09). Any excess above the Lifetime Allowance is subject to the Lifetime Allowance tax charge of 55 per cent of the excess amount. This tax is paid by the beneficiary.

Death benefits can also be provided in the form of dependants' pensions which can be paid if you die in service. Any such pension income counts as taxable income for the beneficiary.

Income Tax - the basics

If you die after you start to draw your company pension, but before age 75

If you die after you start to draw your company pension, but before age 75 any pension protection or annuity protection lump sum death benefit paid following your death will be taxed at a special lump sum death benefits Income Tax rate of 35 per cent. This tax would be payable by the scheme administrator.

If a dependant's pension is provided this counts as taxable income for that dependant.

If you die after you start to draw your company pension, but on or after age 75

If an annuity is purchased which provides for a dependant's pension this will be taxed as income in the normal way.

For tax in the case of an Alternatively Secured Pensions (ASPs) please see the later section ASPs.

Tax on death benefits from a personal or stakeholder pension

If you die before age 75 and before taking any benefits

If you die before age 75 and before taking any benefits, the death benefits are normally paid as a lump sum which usually consists of the return of the pension fund together with the proceeds of any life assurance.

If the amount of the lump sum paid exceeds the Lifetime Allowance (£1.65 million in tax year 2008-09) the excess is taxed at 55 per cent and the beneficiary has to pay this.

Death benefits can also be used to provide dependants' pensions instead of being taken as a lump sum. If a dependant's pension is provided this counts as taxable income for that dependant.

If you die before age 75 but after taking benefits

If you die before age 75 but after taking benefits any death benefits payable as pension income to a dependant would be taxed as income in the normal way.

If the pension scheme provided for a lump sum payment this would be subject to the special lump sum death benefits Income Tax charge of 35 per cent mentioned above - payable by the scheme administrator.

If you die after you start to draw your personal pension, but on or after age 75

If an annuity is purchased which provides for a dependants' pension this will be taxed as income in the normal way.

For tax in the case of an ASP see the section below.

More about death benefits of personal or stakeholder pensions on the pensions advisory service website

Tax on death benefits from 'Alternatively Secured Pensions' (ASPs)

ASPs have been available since 6 April 2006 as an alternative to buying an annuity by age 75.

Now, instead of buying an annuity at age 75, you can continue to invest your pension savings and draw an income from your fund within laid down limits as agreed in the terms of the ASP. This income is taxable as pensions income in the normal way.

More about ASPs on the pensions advisory service website

For deaths on or after 6 April 2007 there is usually no tax liability on any remaining ASP funds if they are used to provide dependants' pensions or if they are given to charity because there are no dependants. However the dependant's pension would be subject to Income Tax in the normal way.

However, if any of those funds are used for inheritance instead (for example, to pass on unused capital on death to other scheme members, such as children and grandchildren) they will be subject to Income Tax charges of up 70 per cent - some payable by the recipient of the 'inherited' funds and some payable by the scheme administrator. The funds may also be subject to Inheritance Tax.

Any Inheritance Tax charged will be calculated after the nil-rate band has been set against the estate of the deceased excluding ASP funds. In cases where there is an amount of nil-rate band available to set off against the ASP funds, special Inheritance Tax rules will apply.