There may be a liability for tax on a private pension you inherit after someone's death. Check the procedure for paying taxes on money paid to you from a pension pot after the death.
INHERITED PENSION TAX: It may need paying on the payments you inherit from a private pension.
Note: The tax rules on a private pension you inherit are not the same as inheriting the State Pension.
As a rule, the person who dies will have already nominated someone to get the money [you]. This means they informed their pension provider to pay money from their pension pot over to you.
In some cases, the provider can make the payments to someone else (a third party). A typical example would be if the nominated person is untraceable or has since died.
Payments made from a defined benefit pension pot can only go to a dependant of the person who died - in most cases. This would usually be a wife, a husband, a civil partner, or a child less than 23 years old.
Some exceptions apply if the rules of the pension scheme allow it. Even so, the money will get taxed up to 55% as an unauthorised payment if you inherit pension payments of this kind.
The rules for inheriting a defined contribution pot are different. You can nominate someone else to get any unused money before your death. But, it must be in a flexi-access drawdown fund at the time of your death.
Several factors will determine whether you need to pay tax on an inherited pension pot. As a rule, it depends on:
|Inherited Pension Payment||Type of Pension Pot||Age the Pot Owner Died||Tax Owed (as a rule)|
|Most lump sums||Defined contribution or defined benefit||Under 75||No tax|
|Most lump sums||Defined contribution or defined benefit||75 (or older)||Income Tax deducted by the provider|
|Trivial commutation lump sums||Defined contribution or defined benefit||All ages||Income Tax deducted by the provider|
|Annuity or money from a new drawdown fund (set up or converted and first accessed from 6 April 2015)||Defined contribution||Under 75||No tax|
|Money from an old drawdown fund (a ‘capped’ fund or a fund first accessed before 6 April 2015)||Defined contribution||Under 75||Income Tax deducted by the provider|
|Annuity or money from a drawdown fund||Defined contribution||75 (or older)||Income Tax deducted by the provider|
|Pension provided by the scheme||Defined contribution or defined benefit||All ages||Income Tax deducted by the provider|
Note: Check current Income Tax rates and Personal Allowances for citizens living in the United Kingdom.
Other tax rules apply if the owner of the pension pot was under 75 when they died and any of these apply:
There is another reason you may pay tax where the owner of the pension pot was under 75. Tax is due if the provider gets information of the death more than 2 years afterwards and you get either:
Note: The provider deducts the current Income Tax rates before you get paid in both of these cases.
In cases such as these, tax liabilities only apply to payments if all the following apply to you:
The amount of taxation you would pay yourself would be:
HM Revenue and Customs will bill you for the tax owed. You must make one single payment for taxes liable on the total amount you get. HMRC bill you after they get informed by the person dealing with the estate of the deceased person.
Note: The executor must inform HMRC within 13 months of the death or within 30 days after they realise tax is owing. Use whichever is later.
The pension provider deducts Income Tax before you get paid if you buy an annuity pot.
As a rule, no Inheritance Tax is due on a lump sum. This is because the payment is usually a 'discretionary' one. This means the pension provider can choose whether to pay it to you.
Check with the pension provider to confirm if the payment of a lump sum was discretionary. If not, the payment may be liable for Inheritance Tax.
Those who fill in a Self Assessment tax return each year get a refund after they send in the return. Those who do not must use a form to claim the refund. It will depend on whether the payment:
Note: The rules differ regarding trusts and taxes if the payment came from a trust.
Tax Rules on a Private Pension You Inherit in the United Kingdom