Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.
Q: I have a private pension worth £44,000 for which my wife has been nominated as beneficiary in the event I die. I am approaching 75 - will my wife have to pay tax at her rate of income tax if she takes over my pension after my death aged 75 or over? Or will she just pay on the amount she withdraws during that tax year?
A: Hello and thank you for your question. You correctly identify the important change in pension rules that occurs when you, as owner of a pension, turn 75. After that point, anyone inheriting your pension could potentially have to pay Income Tax on it, at whatever rate they themselves pay when they withdraw the money.
In answer to your question - if you reach age 75 and your wife inherits your pension (typically into a beneficiary drawdown arrangement), she will only face Income Tax when she withdraws money from it. That means she can spread those withdrawals over several years to manage her Income Tax bill.
For example, if your wife’s income totalled £30,000 a year and she wanted to take money from the pension she inherited from you, she would normally pay Basic Rate tax at 20% on any money she withdraws until her income reaches £50,270 (for tax year 2026/27). Any withdrawals over that in the same tax year would begin to be taxed at the Higher Rate of 40%.
Something else to consider. Pension rules allow for 25% of your money to be withdrawn tax-free. If you haven’t taken your full lump sum before death, it may not become available tax-free to your spouse. Instead, whatever they withdraw is taxed as income. For this reason, you may want to consider taking any remaining tax-free cash as you approach age 75.
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Finally, be aware that a further proposed change is coming in April 2027 that means pensions will be included in your estate for Inheritance Tax purposes when you die. Spouses have an exemption from IHT when inheriting from their partner, so IHT may not be payable on a pension your wife inherits from you, but the pension may form part of her estate after she dies. The exact impact will depend on final legislation and individual circumstances.
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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.
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