Taxation and Inherited Pensions

Tax Issues Regarding Inherited State Second Pensions

There are no Inheritance Tax consequences involved in passing on the State Second Pension. In case you contribute towards the State Second Pension, 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.

Tax Issues Regarding Inherited Alternatively Secured Pensions (ASPs)

In case you have any remaining ASP funds when you die, they may be used to provide a pension for your dependents with no tax liability. The same applies in a case when the remaining fund is bequeathed to charity, then no tax is payable. However, if the remaining fund is used as part of an inheritance, they will be subject to Inheritance Tax of 40% and also to Income Tax charges of 70%.

Tax Issues Regarding Inherited Occupational Pensions

  1. In case you die before your retirement and you have not started to draw 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 (£1.5 million in 2012/13), then this sum will be tax-free. The beneficiary will need to pay tax of 55% on any amount above the allowance.
  1. In case you die after you start to draw your company pension and you are older than 75, then any annuity that provides for a dependant's pension will be classed as taxable income.
  1. In case you die after you start to draw your occupational pension and you have no reached age of 75, any annuity protection or pension protection lump sum death benefit will be taxed at a rate of 35%, payable by the scheme’s administrator. Moreover, your pension will be paid to your dependants, which will be classed as taxable income.

Tax Issues Regarding Inherited Stakeholder or Personal Pensions

  1. In case you die after you start receiving your personal or stakeholder pension (but before the age of 75), then any pension that is payable to a dependant would be taxed as income in the normal way, and any lump sum payable would be taxed at a rate of 35%, which would be paid out by the scheme’s administrator.
  1. In case you die before you start receiving a stakeholder or personal 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 total amount exceeds your Lifetime Allowance (£1.5 million in 2012/13). Any amount above this limit will be taxed at a rate of 55%. And, in case a pension is paid instead of a lump sum, then this will be treated as taxable income.
  1. In case you die after you start receiving your stakeholder or personal 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.