In the years gone by, death used to be followed by a huge 55% tax hit on any money you left behind to your loved ones. However, rules introduced last year mean it is now possible to pass on your entire pension pot to your beneficiaries, tax-free.
‘In this world nothing can be said to be certain, except death and taxes.’ Benjamin Franklin
How Passing On Your Pension Tax Free Works
If you die before the age of 75 and have a Self Invested Personal Pension (SIPP), you can pass on your entire pension fund to your beneficiaries tax free. The money can be passed down as a cash lump sum, or transferred into a drawdown account.
However, if you die after you’re 75 years old, the money you leave behind will be taxed at the marginal rate of the person you nominate to receive the money.
So if your beneficiary has taxable income of £50,000 and receives an extra £20,000 lump sum from your SIPP when you die, they will only get £12,000 after tax. This tax bill can be reduced if the fund is left invested and withdrawn in smaller chunks as and when the beneficiary’s taxable income reduces in later life. If the beneficiary dies before withdrawing the pensions bequeathed to them, they in turn can pass the funds on under the same tax rules.
It is indeed possible to have unlimited successors. This means that a pension can be passed on from one generation to another and so on.
Another interesting point is that you can pass on your pensions to multiple different people.
In essence the new rules brought in surrounding pensions means that pensions are no more just a retirement saving tool, they can be used to plan ad minimise inheritance tax as well.