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.

For the purposes of this video 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 oneoff 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 in 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.

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


#1 Emotional benefits
#2 Investment benefits
#3 Income benefits
#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.

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