In many cases, pensions are held in trust outside your estate, so are free of inheritance tax. IHT may be charged in certain circumstances, so you may wish to take professional advice.
Prior to 6 April 2015, payments received by beneficiaries could be subject to tax at a rate of 55 percent. From 6 April 2015, the tax treatment of pensions inherited on death has become more beneficial.
If you die before the age of 75, then any lump sum received by a beneficiary will be free of income tax. In addition, any annuity or income drawdown will be free of tax. If you die at or after the age of 75 then lump sum payments made between 6 April 2015 and 5 April 2016 will be taxed at 45 percent. Lump sum payments made from 6 April 2015, annuities and income drawdown payments will be taxed at the beneficiary's marginal rate of income tax.
There have been many changes in the pension legislation in recent years and you should seek advice before undertaking any planning in relation to pensions.
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