Inheriting a £500,000 pension — serious money, serious tax planning.
What happens to a £500,000 pension on death? See the tax impact of the age-75 rule and how IHT efficiency makes pensions a powerful estate planning tool.
At £500,000 the stakes are high. Death before 75 delivers the full half million tax-free. Death after 75 with a higher-rate taxpayer beneficiary means £200,000 in income tax — a devastating hit. But even after 75, the pension's IHT exemption means it's still more efficient than non-pension assets: £500,000 in an investment account within the estate could face £200,000 in IHT (at 40% above the nil-rate band), leaving £300,000 before any income tax on gains. The pension, even taxed at 40% income tax after 75, leaves £300,000 — and the beneficiary can spread withdrawals over multiple years to stay in lower tax bands, potentially keeping far more. At this pot size, the lump sum and death benefit allowance (£1,073,100) is still not a concern, but beneficiaries should strongly consider flexi-access drawdown rather than a lump sum to manage the tax bill across tax years.