Can I pass on my pension when I die?

At a glance

  • Passing on pensions is a very tax-efficient way to spread your wealth as part of your legacy planning.
  • Inheriting a pension can be a life-changing legacy for children or grandchildren.
  • Any planning involving pensions should always involve advice from a qualified financial adviser.

Many people only start thinking about inheritance when they’re writing their Will*. Deciding who gets what, and how much, certainly focuses your mind. But there is real value, and tax-efficiency, in financial planning that considers retirement and inheritance as part of the same long-term, family financial plan.

Why it makes sense to pass on your pension

Which would you rather pay? 40% Inheritance Tax (IHT) or 20% Income Tax?

Almost all pensions sit outside your estate, which means they won’t be counted – or liable for – 40% IHT. As we’ll see, when they are eventually cashed in or drawn down from, your beneficiary may be liable to Income Tax. Although unless they’re a higher or additional rate taxpayer, they’ll only pay 20% rather than 40%. So you’ll be handing down an extra 20% tax saving to your next generation.

Your pension savings might be one of the biggest legacies you can leave, apart from property, after you’re gone.

That’s why it makes sense to pass on pension if you’re able to – which means thinking about whether you’ll need it or not for your retirement

Passing on pensions to children and grandchildren

Your pension can do great things, even after you’ve gone. Defined Contribution pensions aren’t normally counted in the final IHT tally. If you’ve accumulated a sizeable pension pot as well as other retirement assets, you may have more than you need for your own retirement.

Passing on a pension could empower your children to realise their own life goals pay off a mortgage early, send their children to a great university or launch a new business.

What’s more, a pension doesn’t have to be earmarked for children or even relatives; you can leave it to anyone. It’s becoming more common to skip a generation and leave pensions to grandchildren.

What you can and can’t pass on

You can’t pass on your State Pension. Also you can’t pass on a Final Salary or Defined Benefit pension in the same way as a Defined Contribution pension. Those Defined Benefit pensions often pay out to a spouse or your nominated beneficiary if you die before them.

Sometimes, you can transfer these Defined Benefit pensions into a pot of money held in a Defined Contribution scheme. You can pass that on to an heir. If you want to do this, however, you must take professional advice if the pension transfer value is more than £30,000.

Passing on a Defined Contribution pension may depend on the type of scheme, the age you die and whether you’ve already accessed some of the money. So always speak to your financial adviser before making any decisions. You don’t want to leave your loved ones with a large tax bill, instead of a great inheritance.

What you need to know

A pension is passed on as a pension. So if your beneficiary withdraws the money, they may be liable for Income Tax.

Usually, the recipient can choose whether to take a lump sum or a regular income from the pension pot.

If you die before the age of 75, your recipient will not pay income tax on withdrawals from the pot.

If you die after the age of 75, your recipient will pay income tax at their rate on any withdrawals. It can seem complicated – so speak to a financial adviser and check more details on the government website here.

Starting a pension for your grandchildren

If you have money to spare, you could also think about opening a pension for your grandchildren. This may seem like jumping the gun, but it’s worth remembering that workplace pensions are less generous than they used to be. Final salary schemes have all but vanished for younger generations, and retirement will be very different when your grandchildren eventually retire.

Only a parent or legal guardian can open a pension in their name but after that, anyone can contribute. Every contribution you make will get the benefit of the Government’s tax relief – a real win-win. Contributions are usually limited to £3,600 a year which includes the tax relief added by the scheme.

Retirement and inheritance planning – getting advice

If you begin by imagining what you’d like to leave your loved ones, you can design a financial plan for retirement that includes this goal. A financial adviser can help you assess what you’ve saved, what you’ll realistically need yourself, and calculate what can be earmarked for your loved ones after you die.

This puts you in the driving seat when it comes to creating your family’s financial future.

Factoring inheritance planning into your retirement planning can change how you save. Helping your children and their children realise their potential is a reward in itself, even if you’re not around to see it.

If you would like to talk about retirement and planning family finances, do get in touch with us now.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

*Will writing involves the referral to a service that is separate and distinct to those offered by St. James’sPlace. Wills, along with Trusts are not regulated by the Financial Conduct Authority.

SJP Approved 05/02/2024


Please note that clicking a link will open the external window in a new window or tab. Links from this website exist for information only and we accept no responsibility or liability for the information contained on any such sites. The existence of a link to another website does not imply or express endorsement of its provider, products or services by St. James's Place.

Sovereign Wealth Limited is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the group’s wealth management products and services, more details of which are set out on the group’s website Sovereign Wealth Limited is a limited company registered in England and Wales, Number 07115386. The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.