Taxation & Inherited Pensions

Depending on the individual circumstances, tax may or may not be payable on a pension you receive from someone who has died.

Tax Issues Regarding Inherited State Second Pensions

If you contribute towards the State Second Pension (formerly known as SERPS, or State Earnings-Related Pension Scheme), then your spouse or civil partner may be able to receive some of this pension when you die. Any pension income that they receive will be calculated as part of their taxable income. However, there are no Inheritance Tax consequences involved in passing on the State Second Pension.

Tax Issues Regarding Inherited Occupational Pensions

If you die before you retire and start drawing your occupational pension, then many companies will pay a lump sum to a chosen beneficiary. As long as this does not exceed your Lifetime Allowance (£1.8 million in 2010/11), then this sum will be tax free. The beneficiary will need to pay tax of 55% on any amount above the allowance. In addition, your pension will be paid to your dependants; however, this will be classed as taxable income.

If you die after you start to draw your occupational pension (but before age 75), then any annuity protection or pension protection lump sum death benefit will be taxed at a rate of 35%, payable by the scheme administrator. In addition, your pension will be paid to your dependants, which will be classed as taxable income.

If you die after you start to draw your company pension (from age 75), then any annuity that provides for a dependant's pension will be classed as taxable income.

Tax Issues Regarding Inherited Stakeholder or Personal Pensions

If you die before you start receiving your pension (and before the age of 75), your death benefits will usually be paid out as a lump sum, which will only be taxed if the amount exceeds your Lifetime Allowance. Any amount above this will be taxed at a rate of 55%. If a pension is paid instead of a lump sum, then this will be treated as taxable income.

If you die after you start receiving your personal or stakeholder pension (but before the age of 75) any pension that is payable to a dependant would be taxed as income in the normal way. Any lump sum payable would be taxed at a rate of 35%, which would be payable by the scheme administrator.

If you die after you start receiving your pension (but on or after the age of 75), any annuity that provides for a dependants' pension will be taxed as income in the normal way.

Tax Issues Regarding Inherited Alternatively Secured Pensions (ASPs)

If you have any remaining ASP funds when you die, they may be used to provide a pension for your dependents with no tax liability. Likewise, if the remaining fund is bequeathed to charity, then no tax is payable. However, if the remaining fund is used as part of an inheritance (i.e. to non- dependents), they will be subject to Inheritance Tax of 40% (calculated after the nil-rate band has been set against the estate of the deceased excluding ASP funds) and also to Income Tax charges of 70%.