Inheriting a sizeable pension can dramatically alter a lot of financial plans. So how should someone make sense of the options available and use this money wisely?
What is an inherited pension?
When someone dies with money in a pension pot, this will usually pass down to whoever they have nominated to receive it. Wills do not include pensions so a separate document would state what should go to who from a pension plan. We call this a Nomination of beneficiary form.
There is no requirement to take any money out. It can stay in the pension and provide an income or lump sums as and when needed.
What are the tax implications?
One advantage of inheriting a pension is that it is free from inheritance tax, unlike bank accounts, property, and possessions. However, there could be tax payable depending on when the person passing down the pension died.
If they were under 75, there should be no tax no matter what. If they were 75 or over, any withdrawals would be added to whoever inherited the pension’s income for income tax purposes. Another thing to note is that inherited pensions do not count towards the cap on how much someone can hold in pensions. We call this the Lifetime Allowance and this limit is currently £1,073,100 until 5 April 2026.
What if I want to invest the money?
Where there is a need for or no need for any withdrawals at all, investing for the long-term may be the best idea. Whatever is not taken out can stay invested and could continue to grow in value tax-efficiently. Most modern pensions will allow the money to invest in a wide range of investment strategies.
Should I just take the money out?
For those with pressing financial concerns taking the money out might be a good idea. For the relatively young, long-term planning might be far less important than objectives such as paying off debts or buying a first home. Tax is a consideration so anyone doing this should seek advice.
As you may have gathered, pension rules and the tax implications are notoriously complex and can change frequently. It pays to take specialist advice to guide you through the minefield.