In our weekly series, readers can email in with any questions about retirement and pension savings to be answered by our expert, Rachel Vahey, head of public policy at investment platform AJ Bell. There is nothing she does not know about pensions. If you have a question for her, email us at money@theipaper.com.
Question: I know that 25 per cent of my pension pot is tax-free and that pensions will soon form part of your estate for inheritance tax purposes. My understanding is that if I die after I turn 75, whoever gets my pension will need to pay income tax when they take money from it – as well as inheritance tax when they receive it – but if I die before I turn 75, they won’t. Would it therefore be a good idea to take the 25 per cent tax-free part before I turn 75 so that my family who inherit the money pay income tax on a smaller portion?
Answer: From April 2027, unused pension savings will usually count as part of your estate for inheritance tax (IHT).
For those with a defined contribution (DC) pension – where you build up a pot of money to use at retirement – this means any pension you have not yet accessed could be included when working out whether IHT is due.
Your personal representatives will be responsible for calculating and paying any IHT. There is an important exception. If your spouse or a civil partner inherits your pension money, then it remains exempt from IHT. But if the money is passed to, say, an unmarried partner – even if you have lived together for decades – or your children, then IHT may be due.
