I inherited a pension - can it go to my children instead?

Q: I have been bequeathed a £150,000 SIPP (self-invested personal pension). Instead of taking it, can I pass it on as SIPPs for my 3 children if I open them in their names?

A: Thanks for your question. More and more people are finding themselves in situations like yours, looking for ways to pass the inheritance they receive directly to their children.

That’s because the average age at which people inherit money is rising. It is not uncommon for those inheriting money from their parents to be near, or even in, retirement themselves. By that point many are financially secure so want to pass money directly to the next generation and avoid creating - or adding to - an Inheritance Tax liability.

• Read more about Inheritance tax here

Can this be done with a pension that you inherit? Unfortunately, the answer would appear to be ‘no’ - although there might be other routes you can take.

For non-pension wealth that is passed on there is a reasonably straightforward way to achieve this - a legal document called a Deed of Variation. This potentially allows the beneficiaries of an inheritance to alter the will of a deceased person up to two years after their death, adding new beneficiaries if they wish.

There are strict rules in this process. Most crucially, any beneficiaries left worse off by the change need to agree. A Deed of Variation can be used where a will is in place, or in the absence of a will when the rules of Intestacy apply.

Pensions, however, are treated differently due to the way they are structured. SIPPs - or self-invested personal pensions - are typically held in a discretionary trust. This means they are governed ultimately by trustees who will decide who receives death benefits, regardless of what a Will - or a Deed of Variation - states.

This has the potential to become even more important in April 2027, when the pensions of deceased people start to be included in estates for Inheritance Tax purposes.

• Read 9 ways to protect your pension from IHT changes

So - what can you do now that the SIPP is already in your possession? I asked our advice team for some possible ways forward to mitigate a potential IHT liability arising from an inherited pension. This is not personalised advice.

One course of action could be to leave the inherited pension untouched and nominate the children as equal beneficiaries on death. A key advantage is the SIPP remains available to use if needed and there are no income tax implications if not accessed. The main disadvantage is that the retained pension will drop into your IHT calculations following the rule change due next year.

• Learn more about our award-winning Self-Invested Personal Pension

Another way could be to withdraw all the pension and give a cash gift. Potential disadvantages here are that this may trigger income tax on the withdrawal (if the original owner died after aged 75), and the IHT seven-year survival rule on gifting which means the gift only becomes IHT-free if you survive 7 years.

• Read more on the 7-year rule for IHT

It could be possible to take a regular income from the pension, managing any income tax (if the deceased aged 75+) and make regular gifts to children, for which there is potentially an exemption in the IHT rules when done correctly. These gifts could then fund SIPPs in the children’s names, subject to their own annual limits.

Alternatively, the SIPP could be used to buy an annuity. This would effectively spend the capital and reduce the size of the IHT-able estate. As with the scenario above, this income could be gifted on a regular basis and, if within gifting rules, could be exempt from IHT.

• Read about how to keep records and avoid an unnecessary IHT bill

The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.

Our retirement specialists can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.

• Explore all our Inheritance Tax articles for expert guidance, updates and practical estate planning tips

Got a burning question you want to ask? Why not drop us a line. Click here to ask your question.

• Read: Is now the right time for financial advice?
• Read: How to keep IHT records and avoid an unnecessary bill
• Read: 9 ways to protect your pension from IHT changes

Important information: investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.