If you have received an inherited pension, then it can be tempting to take all the money and put it in your bank account.  

After all, pensions can appear complicated. So it can seem simpler to start making plans for this money when you know where it is in your bank account.  

It’s likely to be a significant amount of money, but before you rush into making any decisions consider keeping the inherited pension inside a pension. 

This may save you a fortune in taxes and could ultimately make you better off in the long run. 



How to keep your inherited pension in a pension

For the purposes of this article when I talk about an inherited pension, I mean a defined contribution pension. Also known as a money purchase pension.

The type of pension where there is a pot of money that the deceased saved into and invested.  

If you have been nominated as a beneficiary of one or more of these pensions, then you should have the opportunity to keep the money inside a pension. 

Don’t be put off by the paperwork you receive from the existing provider. They may bamboozle you with lots of different options like taking an income for life (annuity) or a one-off cash lump sum.  

The option you should look for though is moving the inherited pension into a beneficiary drawdown pension.  

Even if the current provider does not have this option available you should usually be able to transfer the pension to a provider of your choice that does allow this.  

I have written previously about what you need to do to claim a deceased person’s pension. Once you have completed probate and followed the steps outlined in that article you will have your own beneficiary drawdown pension. You should set up online access so you can easily manage this pension including picking investments and managing withdrawals. 

If you are the beneficiary of multiple defined contribution pensions, then you could move them all to one provider (to keep things simple), but the provider will likely need to keep them all as separate beneficiary drawdown pensions. So, one account but multiple lines of pensions when you log into the app or online. 

Once you have your beneficiary drawdown pension set up don’t forget to complete your own nomination/expression of wish form with the pension provider so you can direct what happens to the pension if something happens to you. 


The benefits of keeping your inherited pension in a pension 

There are four major benefits of keeping your inherited pension in a pension. 


#1 – Emotional benefits 

By keeping the inherited pension as a pension, it keeps a part of the deceased with you. You are taking ownership of something they worked and saved hard to build.

Rather than taking it as cash that you then mix with your own and ultimately spend, it ringfences a pile of money that then reminds you of what they have left you.  

A beneficiary drawdown pension doesn’t need to be touched if you don’t need it and you then ultimately pass it down to your own children when you have gone and they can keep it in a pension.  

A nice little present from their grandparents.


#2 – Investment benefits 

If you were to take the cash lump sum option rather than the beneficiary drawdown approach, then you will be moving money into a bank current account or savings account which will only earn you interest. That’s only if you spend time sourcing the best interest rate.

Over the long run interest rates paid on cash savings have a hard time keeping up with rates of inflation (rise in cost of living). So, you won’t see any real growth on this money and it will decrease in real terms over time. 

By keeping the inherited pension in a pension, you will have access to a huge range of different investment options depending on which provider you choose.  

You could invest the money in individual stocks, investment funds, gold and much more.  

If you don’t need the money and are prepared to keep it invested for the long term (10/15 years+) and you invest into the global stock market, there is a very good chance you will see superior growth over and above inflation.


#3 – Income benefits 

A beneficiary drawdown pension provides you with lots of flexibility.  

You can delay taking any money out of the pension indefinitely, take a lump sum at any point or start and stop a regular monthly income.  

All of this means you can adapt your own retirement plans.  

Perhaps this new money allows you to retire earlier or start to phase your retirement by reducing your hours and pay at work and then offsetting this with withdrawals from the inherited pension. 

However you start to access the inherited pension nothing is set in stone, you can always change your mind at any point and you ultimately always have the option to pull it all out.


#4 – Tax benefits 

This is the big one. 

I should caveat first though that there are different tax rules if the deceased leaving the pension died before or after age 75.  

If they died after reaching age 75 then the money you withdraw from a beneficiary drawdown pension will be added to your other income for that year and taxed at your marginal rate of Income Tax.  

If the deceased died before reaching age 75 then there is no Income Tax due on any withdrawals for the rest of your life. 

If you were to take the cash lump sum option and place the money in a bank account or high interest savings account, then you may find you start paying tax on the interest earned.  

Anything you keep in the inherited pension will grow tax free. That means no Income Tax on dividends earned from your investments or Capital Gains Tax if you sell investments inside the pension.  

If the deceased did die before age 75 using the inherited pension could be a great way to boost your own pension pot.  

Let’s say you are working and have a workplace pension scheme. You could now pay more of your salary into the workplace pension which provides you with valuable tax relief and then offset the reduction in salary with withdrawals from the inherited pension. The benefits of doing this can be huge if you are currently a higher rate taxpayer. 

Finally, by keeping an inherited pension inside a pension you can avoid Inheritance Tax for your own children. 

If you take the money out of a pension, then it will form part of your estate. On your death this money will be added up, and up to 40% of the amount could be lost to Inheritance Tax. 

Whilst the money stays inside the pension it is outside of your estate and is not subject to Inheritance Tax. So, if you ultimately don’t get to spend all of your inherited pension, your children can inherit it without paying Inheritance Tax. 

It is also much quicker and easier to get the pension funds as you don’t need to wait for the Will. Pensions are not dealt with via a Will and use the nomination/expression of wish form instead. It’s much easier to change this form rather than having to write a whole new Will every time if the money wasn’t kept inside a pension. 

If you would like to stress test your retirement plans or even to get a plan in place then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy and protected retirements over the years. This could be you too.  

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.