Related
news
16 July 2026
Every little helps – Tesco uses scale, data and loyalty to stay ahead6 min readAuthor
Shares Magazine
Ask the experts. Rachel Vahey is here to answer questions on pensions. If you’d like a question considered for a future edition send it in now.
Or alternatively leave a rating for the article and include your question in the comment box.
I have a question about inheritance tax and pensions. I will be over 75 years old at the time of my death. My property and cash will use up most of my exemption allowance of £500,000. I am divorced and my daughter is my only beneficiary. I have a SIPP with AJ Bell.
Can you confirm if my remaining SIPP is transferred to my daughter after payment of IHT, can she access the pension straightaway and what income tax would she pay? If I add my daughter’s two children as beneficiaries, would this would be beneficial from an income tax point of view, as they are non-taxpayers ?
If I bought a single life annuity with part of my SIPP funds, would there be any IHT payable?
John
Rachel Vahey, AJ Bell Head of Public Policy, says:
New rules will bring pensions into inheritance tax (IHT) calculations from April next year. While that may seem some way off, there is limited time for those affected to understand what the changes will mean for them and their families.
Let’s start with nil rate bands – these must be split proportionately between the estate and the pension. Estates won’t have the flexibility to, say, count the pension against the whole remaining nil rate band.
Once the proportioned nil rate band has been deducted from the pension fund, IHT will be worked out as 40% of whatever is left, if it’s not going to an exempt beneficiary such as a spouse, civil partner or charity. The personal representative (PR) could pay the IHT due from the estate’s other money, or the beneficiary could pay the IHT from their own pocket. These options would mean the whole SIPP (Self-invested personal pension) fund passes to the beneficiaries (less any income tax due).
An alternative option
Another option is for the beneficiaries or PR to ask the pension scheme to pay the IHT directly to HMRC from the SIPP. It’s important to note the pension scheme can only pay the IHT arising from the assets held within the scheme - it can’t pay IHT that has arisen due to assets in the wider estate.
The balance can then be passed to the beneficiary. You say you will be older than 75 on your death so your daughter would pay income tax on any money she withdraws.
If you have named her on your expression of wishes form, she could take the money as either a lump sum or through drawdown, giving her flexibility over when and how much she withdraws, which may help her manage the tax due.
She can access the money as soon as the money has moved into beneficiary’s drawdown, in other words, she doesn’t have to wait to reach the age of 57. However, if the PR acting for the estate believes that IHT will be due on the payment from the pension, then it can apply a withholding notice. This means the pension has to hold onto 50% of the pension funds and can pass only the other 50% onto the beneficiary until the IHT is paid, the notice is withdrawn or 15 months after death. This is to stop the situation arising when IHT is due, but the whole pension fund has been paid out and it’s difficult to get the IHT paid.
You could nominate your grandchildren as beneficiaries. As non-taxpayers they could take up to their personal allowance out of the pension each year without paying tax.
However, there is the question of what do they then do with it? If they don’t have any immediate need, it may be better to keep it in the tax wrapper where it can grow tax-free and be there for when they do need it, although they may have to pay income tax on it later.
What a guaranteed period means when it comes to annuities
If you buy a single life annuity it will stop on your death. You can choose to set up a guaranteed period where if you die within the guaranteed period the payments will continue to be paid until the guaranteed period ends. This guaranteed period can be up to 30 years. However, those guaranteed payments will be subject to IHT. You can also choose to set up something called value protection which returns a lump sum based on the annuity purchase price less the instalments that have already been paid out. But again that lump sum would be subject to IHT.
As you can see, the new rules have the potential to be complicated. But it’s good to find out the options now to help you and your family plan.
Rachel Vahey: Head of Public Policy
Rachel is AJ Bell's Head of Public Policy. She helps financial advisers and planners understand the changing pensions and savings environment, as well as how new legislation and regulation affects them and their clients.
Rachel...
