Answered by Andrew Jenkinson
Before the 2015 Budget, it was generally only possible to pass a pension on as a tax-free lump sum if you died before the age of 75 and you hadn’t taken any tax-free cash or income. Any breach of these requirements would trigger a 55% ‘death tax’ charge.
Now the tax treatment of any defined contribution pension passed on death will depend on your age when you die.
What happens to your pension if you die before age 75:
- Your beneficiaries can usually take the whole pension fund as a tax-free lump sum or draw a tax-free income from it either by purchasing an annuity or by utilising pension drawdown
What happens to your pension if you die after age 75:
There are three options for your beneficiaries:
- They can take the whole fund as a single cash lump sum subject to a 45% tax charge. However, payments made after 5 April 2016 will be taxed as your beneficiary’s income;
- They can take a regular income through an annuity or drawdown with the payments being taxed as your beneficiary’s income;
- They can take occasional lump sums through drawdown which will be taxed as your beneficiary’s income.
More detail on inheriting drawdown pensions is available here →
Frequently Asked Pensions Advice Questions
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