A person is seen as a very long term investment, and everyone wants to make sure that they put away as much money as possible. Your pension can go up or down over time, due to changes in laws and tax rules in the future.
Not only does a pension help you support yourself during your retirement, but you can use your pension as a tax-efficient way of passing on your money.
Thus, you can nominate someone to be the beneficiary of your pension once you die, and they will receive what is left of your pension. However, your beneficiaries may be wondering whether they will have to pay tax on this income that they are receiving.
In this article, we will be discussing whether beneficiaries have to pay tax on pensions they receive.
Your Type Of Pension Matters
Nowadays, a lot of pensions are quite flexible, and they come with various benefits known as death benefits.
However, these benefits can always change, therefore it is also worth checking on the conditions of your pension to make sure that nothing has changed without you realizing.
Death benefits are features that will take place once you have died. They usually consist of who you have named as a beneficiary and will receive what is left of your pension.
With a flexible pension, they usually allow you to pass your pensions tax-free onto your beneficiaries. However, this is only the case if you die before you are 75 years old.
If you die past your 75th birthday, then your named beneficiaries will have to pay income tax on any amount of the pension that they receive.
What Happens If A Pension Has No Death Benefits?
If the pension plan that you have has no death benefits, then you could always transfer your pension into a pension plan that does have these benefits.
Yet, this isn’t for everyone. This is because for someone who may be in ill health, their pension plan may be full of health benefits that are suited to them, and if you transfer your pension you could lose their benefits.
With that being said, it is always important to compare our options to make sure that you have the best benefits that are suited to you.
Inheritance Tax And Pensions
Once someone dies, inheritance tax is typically applied to any belongings, money and property that is passed on. However, inheritance tax doesn’t usually apply when you pass your pension money onto any beneficiaries.
This is due to the fact that your pension isn’t seen as part of your taxable estate, thus no tax is charged.
However, it is important to keep in mind that any of the money you take out of your pension, then becomes a part of your estate. Therefore, that money you took out can be taken under inheritance tax.
In addition, this rule also applies to any tax-free cash that you may have but have not spent.
Some older style pensions can be part of your estate, which means then your pension could be charged under the inheritance tax. As a result, it is always important to see whether inheritance tax is applied to your pension.
When Is A Pension Paid After The Death?
If you happen to die suddenly or before all your assets in your pension have been paid out, then the amount that is left in your pension will be paid out to your named beneficiaries.
The money can be paid in two ways, either a one large lump sum or in regulated fixed payments. However, this will depend on the amount of money that is remaining in your pension.
You cannot name someone in your will to receive this money. Instead, you must name them in your pension contract as the beneficiaries. You must check the details of who may receive your pension when you die, as the details can differ from contract to contract.
In some pension contracts, it says that the pension stops when the participant dies, while others allow for the pension to be distributed to beneficiaries, such as a living spouse or even a dependent like children.
It is really important to check the rules and regulations of your pension contract, as they are all different.
Who Can Be A Beneficiary For Your Pension?
Commonly, a beneficiary can be anyone you like. However, they are normally a spouse or a family member. If you have any children, then you may put them down as beneficiaries.
Although, in some situations, if you want to name someone else apart from your spouse as a beneficiary, then you may need to get your spouse to waive any retirement rights that they have.
This doesn’t apply to everyone but if you have a joint life pension, then if you wanted to name a child or a sibling etc., as a beneficiary then your spouse would have to waive their rights, and you would also have to get their permission to name someone else as a beneficiary as well.
Your pension is a great loophole to give your loved ones more of your money once you die, that won’t be taxed. Your pension isn’t seen as part of your estate, therefore it isn’t seen as money that needs to be taxed once you die.
Before you die, you can name beneficiaries to have what is remaining of your pension once you have died.
The money that beneficiaries received isn’t charged with any inheritance tax, either. This only counts towards money that hasn’t been touched or taken out of your pension.
Once that money has been taken out, then it is eligible for inheritance tax, or income tax if you have taken it while still alive.
We hope this article has given you a better understanding of any tax beneficiaries may have to pay on a pension.