Can a private pension be passed onto a child?

Are you looking to help out one of your children with their monetary needs? Perhaps you want to provide your loved ones with a financial gift? You might be looking towards your private pension as the answer and wondering if a private pension can be passed onto a child, but there are various points you need to consider when understanding how this works.

Can a private pension be passed onto a child?

So, can a private pension be passed onto a child? The good news is that, yes, it is possible to shift your pension funds to any designated family members or other beneficiaries.

If you have looked into this in the past, you may have heard about a 55% pension “death tax”. Fortunately, this has been left in the past – it was abolished by the government back in 2015. As a result, your remaining pension pot will not be subject to any excess charges and fees.

Better yet, pensions are also not usually included with your estate when it comes to inheritance tax purposes. There are even some instances where no tax needs to be paid at all.

How pension types can affect money that is passed down

There are various points to consider when passing your pension down to your children – mainly tax-related. Here are how different pension types can change the situation:

“Drawdown” or untouched pension pot

Do you have a personal pension? Maybe an employer-run contribution pension? Either of these means you can pass on your pension to your children or other beneficiaries – these don’t necessarily have to be relations, either. They can receive the money either as an income or a lump sum.

There are tax differences depending on the age you pass away. Pass away at 75 or older, and the beneficiary will have to pay income tax based on their marginal rate, aka the income tax rate they pay. If you die before your 75th birthday, your pension is passed on completely tax-free.

Salary or defined benefit-related pension

With either a salary or defined benefit (DB) pension, it will typically result in a surviving spouse receiving the pension amount. For your offspring to benefit from this money, however, it requires a defined contribution arrangement to transfer your rights.

Pension annuity

When you die, income is usually stopped with a pension annuity. However, this isn’t always the case. A chosen benefactor could keep receiving an income or lump sum when you pass away. This is sometimes the situation with capital-protected, guaranteed period, or joint annuities.

Again, the tax paid by the beneficiary – if applicable – is dependent on if you die before or after the age of 75.

State Pension

After you have passed away, it is not possible to pass your State Pension rights onto your other family members. However, it is possible to currently give these benefits as a financial gift. Keep in mind there are set annual limits in terms of how much can be passed on tax-free.

A savvy tax-efficient tactic

If you are between the age of 55 and 75, there is a tactic available that can make looking after your estate even more tax efficient.

For those that fall between the set age criteria, it is possible to take up to 25% of your pension fund as a lump sum without any taxes imposed. That’s right: it is a tax-free amount that you can use in any way you want, whether it’s for yourself or to pass on to your children.

This is potentially a savvier approach than simply keeping the money in your pension pot. If you do this and pass away on your 75th birthday or beyond, the entire pension pot will be taxed as normal – including that 25% you could have received as a tax-free lump sum.

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Disclaimer 

The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

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