Can my children inherit my pension ?

It’s a common question that I get asked during my consultations with clients. Can my children inherit my pension pot. This could be applicable if someone in single, so they have no spouse or partner. So they want to pass on any remaining funds to their children.

It can also be a good way as part of your future estate planning. Or a consideration of you have substantial assets as part of Inheritance tax planning.

Passing on a pension to your loved ones, so your immediate family. Could prove to be a major consideration to you, to provide some comfort and security to your family moving forwards.

So, firstly nominate your respective beneficiaries ?

The first thing to do is to complete a nomination form sometimes called an expression of wishes form. Which can be done directly with your pension provider (normally in paper form or by ticking simple boxes on an app or online account). The idea is that the respective provider will know who you want to pass any funds onto in the event of your death. This will simplify the process and they hopefully won’t spend weeks or months trying to find possible benefactors.

If you are in the fortunate position of having more pension funds than you need. Or you haven’t managed to fully empty the pension pot. You are then able to pass on any remaining funds to your chose beneficiary. But this will depend upon what type of pension scheme you have and if you have accessed the funds in a particular format.

So, when you normally join a new pension plan, you will complete relevant forms as stated above to choose your elected beneficiary. It can be amended at any time in future if your circumstances change.

It could be :

• Spouse
• Children
• brothers and sisters
• nieces and nephews
• grandchildren
• it doesn’t even need to be a relative it could be a friend
• charity or another institution

What about the tax implication ?

At present it depends upon the age that an individual dies ? As the rules are different for Defined Contributions pots if you happen to die before age 75 or after age 75.

If you die pre age 75:

At present any remaining funds in the pension pot will pass to your beneficiaries free from income tax. As long as they act within a 2-year window and let the pension provider know about their decision, about how they may decide to access these funds.

If they fail to act within the 2-year window, they will pay income tax on any funds received. Either via a one-off lump sum or by taking an income. It would be added to any other income they receive during that tax year and be taxed at their respective marginal rates.

If you age post age 75:

Your beneficiary can receive the remaining funds by lump sum or income format, but they will pay income tax on any funds received. Again it would be added to any other income they receive during that tax year and it will be taxed at your marginal rates.

So the cut-off age for age 75, could prove to be vital as part of your future tax planning strategy.

What about the dreaded IHT rules ?

At present if you pass on any funds to your beneficiaries they are currently free from inheritance tax. So they currently don’t fall into your estate when adding up your total assets.

However though, a recent announcement in the budget during late 2024. Labour has announced that the rules will change from April 2027, so inherited pensions will then form part of your estate. A consultation process is taking place in early 2025, so the exact details have not been announced. But it’s something you may wish to look at or consider ahead of those impending changes.

The rules dependent on the type of pension you have !

Untouched defined contribution pension:

Most people these days, will be enrolled automatically in a simple workplace pension with their current employer. They will normally make a contribution each month along with their employer through the payroll.

These funds will then be invested on a regular basis and they pot will have a value which will go up and down on a daily basis. Depending upon where the contributions are invested.

For this scenario, any remaining funds in the pot. Can be passed onto a beneficiary as per the rules of the scheme. It could be paid as a one-off lump sum, they could buy an annuity (guaranteed income) or they could get a flexible income (drawdown).

If they take a lump sum they are free to do with what they want with the funds. They could clear a mortgage, go on holiday, buy a car or home improvements or invest elsewhere.

If the pension was used by the owner to buy an annuity:

Someone may have used the pension funds to buy an annuity. Where a pension provider will pay them a guaranteed income for lifetime or a fixed term period.

If someone has purchased a single life annuity, it would normally cover that person until they die. It would then cease on death and no further funds would pass to the beneficiaries. Some providers may give a short term guarantee in the early years of the term. (but check with the provider)

They may well have bought a joint life annuity, so it will cover the owner plus their spouse or partner. It could give some added protection to your loved one. In this case it would then provide a lower level of income until that person was then to die. (so the joint person named on annuity).

Or they may have bought a fixed term annuity, which will pay for a set term or period of time, Typically between 5 to 30 years. So if you die during the fixed term period, your beneficiary will receive a level of guaranteed income for the remainder of the term.

As stated above if the original person died pre age 75, the surviving benefactor will pay no tax as long as they act within the 2 year window.

What if the pot was already in drawdown:

If you die before age 75, you can leave any remaining funds held within the drawdown (FAD) account to your beneficiaries. It could be passed onto them completely income tax free as long as they act within the 2 year timeframe.

So a simple example: You may start accessing a FAD pot at age 60 with £ 100,000 invested. If someone dies ages 70 with £ 20,000 still invested. It can pass to the beneficiary completely income tax free.

If someone dies at age 76 with £ 20,000 still invested, it can still be passed on and inherited. But the respective beneficiary will then pay income tax at their marginal rate. (subject to UK tax rates) It would be added to any other income they receive during that tax year. It may even put an individual into a higher tax bracket when they decide to access the remaining funds.

How they access the remaining funds will depend upon the scheme rules of the drawdown pot. So check with the respective pension provider. But normally options apply in that they could take it as a one-off lump sum, carry on accessing via a beneficiary drawdown account, or they could move it into a new annuity product.

What if the pension is defined benefit ?

A defined benefit (DB) pension is somewhat different in nature. It is usually based on 3 conditions, accrual rate, length of service in the scheme and final salary. The risk to pay out benefits is borne by the sponsoring employer and the income is guaranteed or defined.

Once in payment, the member will be paid an annual income for their lifetime. They will receive an annual pay increase each year as per the scheme rules. Once the member dies it would normally pay out a spouse’s pension. Usually up to 50% of the members benefit being paid. It would then pay the spouse an income until they die. They would still receive an annual increase each year, as per the scheme rules.

It could pay a pension to dependent children, but most scheme rules state they will pay an income until age 21 or 23 only. So it pays to check with the relevant scheme rules.

If the DB pension isn’t in payment and they may be an active or deferred member. They will usually pay a one-off lump sum benefit as per the discretion of the Trustees running that scheme.

What about the state pension ?

At present the state pension is based on an individual national insurance (NI) record. It someone has paid 10 years contributions they will receive some state pension. If they have paid the full 35 years they should attain the full amount. It will hopefully be increased each April by the so-called Triple lock.

The DWP will write to you at set ages, currently it is paid from age 66. Although this will increase to age 67 in stages ahead of 2027. It is being reviewed as to possible increases in future. For younger people it could be due at 68 or even later if they change the date of entitlement. Greater information can be found at https://www.gov.uk/browse/working/state-pension

The current rules are somewhat complicated and the state pension will normally cease when the individual dies. It they don’t reach state pension, then normally no pension can be claimed. As the new state pension from April 2016, is solely based on an individuals national insurance record.

At what age can I access my personal pension ?

Under current rules, you can access a private or workplace pension from age 55. It could be at age 50, it you have a protected pension age with the scheme. Or you meet the ill-health criteria.

This will be increased from 6th April 2028 until age 57. The idea being that it will be 10 years below when someone can claim their state pension.

So based on the above information, you could access some of your pension pot from age 55 or 57 (MPA). Then you could leave any remaining funds to your family members after your death.

Remember !

If you found this blog post informative, check out my other posts on https://moneyminted.co.uk which covers pensions, savings, investing, recommended investing books. So you too can reach improve your financial knowledge and ultimately reach your investing and financial goals.

It’s not a get rich quick journey, but you will get there in the end if you create and action plan and think long term.