I have £300,000 invested in a pension. How can I leave this to my six grandchildren?

I have £300,000 in a personal pension that I have invested myself and that I don’t need for my living as I have a pension income from a final salary and Isas that I can tap into for extra tax-free income.

I am a widow, have six grandchildren, currently aged between 12 and 1, and am considering leaving this pension pot to them, but how does this work if they want to take money out of it after I die?

Would they have to wait until they were 57 years old before they could take money out of the pension, as people normally would, or could they take money out earlier?

If they could get the money out sooner, would they have to take it all at once, or could they leave it there and use it whenever they wanted?

I’ve thought about how this would be the ideal way to leave them all some money for a home deposit, but I don’t want them to wait until they’re 57. Hopefully they will be able to buy their own home before their mid-fifties. Anonymously, via email

Harvey Dorset from This is Money replies: If you are in a position where you can afford to leave a pension untouched for your grandchildren, this is ideal if you want them to benefit from your savings in potentially the most tax-efficient way.

Sipps, as self-invested pensions are known, are a popular form of personal pension that allows people to invest in a retirement package, giving them a lot of control over the investments they hold.

Many people will have a Sipp in addition to a pension pot they have built up with their employer. This can be a defined contribution plan or a defined benefit plan.

Those whose employer pensions are good enough to fund their retirement may not need to use their Sipp to live on.

As you said, you hope that your Sipp can help your grandchildren get into the housing market in the coming years, and as such there wouldn’t be much point if they only got access to it when they were 57.

The good news is that your grandchildren don’t have to be 57 to withdraw money from an inherited pension. As our experts explain below, you can rely on an inherited pension at any time.

Moreover, this can be advantageous from an inheritance law perspective, although this depends on whether someone dies before or after the age of 75 and how much the beneficiary subsequently earns.

If someone under the age of 75 dies, a pension can be inherited tax-free – although you should be aware that there are calls for an end to this benefit of pension inheritance.

If a person dies after age 75, income tax must be paid on any withdrawals made by the beneficiaries. This means they can be taxed at 20 percent, 40 percent or 45 percent.

This means that if you die after the age of 75, it is likely to be most tax efficient for your beneficiaries to gradually withdraw money from an inherited pension pot.

If you divide £300,000 evenly and the grandchildren each took £50,000 as a lump sum and had other income, they are likely to be above the £50,270 higher tax threshold.

I spoke to two experts about the best way to leave your money to your grandchildren.

Craig Rickman, personal finance expert at Interactive Investor, answers: First, it’s great that you’re planning ahead. Considering how you want your Sipp to be distributed upon death can be a little morbid, but it is a very important exercise.

It can reduce friction between heirs, potentially save them some taxes, and give you peace of mind that your hard-earned savings will end up in the intended hands.

However, there are a few things to unpack here. As you may have noticed, the retirement landscape can be quite complicated.

So, what are the things you need to know?

Before you do anything else, make sure you have completed an Expression of Wishes and Nomination Form. In this letter you tell your Sipp provider who you want to inherit your pension upon your death.

In this case, you would name your six grandchildren and select what percentage each of them gets. Please note: the funds do not have to be divided equally.

Although your wishes are not binding – your Sipp provider ultimately decides how the money is distributed – they are strongly taken into account. It is also important to update this form if your circumstances or intentions change at any time in the future. You can do this at any time.

When it comes to inheriting Sipp death benefits, beneficiaries typically have two options. They can receive the money as a one-time payment, or opt for a so-called beneficiary withdrawal.

In the latter case, the money remains in a pension wrapper, preserving the benefits of tax-free profits and dividends, and giving the beneficiary the option to withdraw money as and when they wish.

Unlike the standard withdrawal, there are no age restrictions on withdrawals, so even people under the minimum retirement age of 55 (rising to 57 in 2028) can access the money.

How does the tax on pension funds that are inherited upon death work? Although pensions usually escape inheritance tax, your beneficiaries may pay income tax, although this depends on when you die.

If you die before the age of 75, your grandchildren can receive your Sipp money free of income tax – whether they receive a lump sum or withdraw money from a beneficiary withdrawal plan.

With regard to lump sum payouts, it must be taken into account that a two-year rule applies. This means that the money must be paid out within two years after the pension provider has been informed of your death. If the process takes longer than two years, the money may be taxable.

If you die after age 75, any withdrawals or lump sums will be taxed at the beneficiary’s marginal rate in the relevant tax year.

Under the current regime, anything within the basic rate tax bracket is taxed at 20 percent, while anything within the higher or additional rate brackets is taxed at 40 percent or 45 percent respectively.

It may also be worth introducing another option. Because you want the money to go toward a home security deposit for your grandchildren, they may benefit from receiving the money earlier.

You can therefore donate the money to them while you are still alive so that they can enjoy the money now or in the near future. This involves withdrawing money from your Sipp and then passing the money on to your grandchildren.

This approach has some tax consequences. With every Sipp withdrawal you pay income tax at your marginal rate, which means you may have less to pass on to your grandchildren. In addition, the gifts may be subject to inheritance tax if you die within seven years of the date the gifts were made.

So if you’re happy for your grandchildren to wait until after your death before inheriting your Sipp, keeping the money untouched in the pension wrapper should be the best course of action.

Michelle Holgate, financial planner at asset manager RBC Brewin Dolphin, said: An inherited defined contribution pension pot allows beneficiaries to draw on the money at any age, as the payment of death benefits is not linked to their own minimum retirement age.

Depending on scheme-specific rules, they often have the option to withdraw the money directly from the deceased’s pension in one go, choose to have the money paid into a pension in their own name and withdraw withdrawal income (which can be done at any time). age) or even buy an annuity.

If you die before the age of 75, beneficiaries can usually withdraw the inherited pension funds free of income tax.

There is a two-year time frame within which the funds must be designated, otherwise the pensions may become taxable. Someone has a lump sum and a death benefit. If this amount is exceeded, the excess will be subject to tax.

The standard fee is currently £1,073,100. However, if you die after age 75, beneficiaries each pay tax at the highest marginal income tax rate on the withdrawals they make.

Leaving money through a pension can be tax efficient, as pension schemes generally fall outside a person’s estate for inheritance tax purposes.

Because a pension is not part of your estate, it will not be transferred according to your will. It is therefore important that you complete a wish expression form to let the pension administrators know who you want to benefit from the funds and in what proportions.

Everyone’s circumstances are different and the pension rules differ per scheme. I therefore strongly recommend that you seek financial advice to ensure that your pension schemes work as efficiently as possible for you during your lifetime and are correctly set up to pass on to your beneficiaries in the way you would like your passing away.