Can You Put an Inheritance Into a Pension?
Yes, you can contribute inherited money to a pension, subject to the annual allowance. The annual allowance for pension contributions is currently £60,000 per tax year (or 100% of your earnings, whichever is lower). Contributions receive tax relief at your marginal rate, making this one of the most tax-efficient ways to use an inheritance.
Tax-Efficient Strategies for Inherited Money
There are several ways to make an inheritance work harder for your retirement:
- Maximise pension contributions: Use up your full £60,000 annual allowance, plus any unused allowance from the previous three tax years (carry forward)
- Use ISA allowances: Contribute £20,000 per year to ISAs for tax-free growth alongside your pension
- Spread contributions over multiple years: If the inheritance exceeds one year's annual allowance, plan contributions across tax years
- Consider salary sacrifice: If your employer offers it, salary sacrifice pension contributions also save National Insurance
Carry Forward Rules Explained
If you have not used your full pension annual allowance in the previous three tax years, you can carry forward the unused amount. This means you could potentially contribute up to £180,000 plus the current year's £60,000 allowance (£240,000 total) if you have three years of unused allowance.
To use carry forward, you must have been a member of a registered pension scheme in the year you want to carry forward from. You must also have sufficient earnings in the current tax year to cover the total contribution.
Common Mistakes When Investing an Inheritance
People frequently make these errors when they receive a large sum:
- Doing nothing: Leaving inherited money in a savings account earning below-inflation interest erodes its real value over time
- Exceeding the annual allowance: Contributing more than £60,000 in a single tax year (without carry forward) triggers a tax charge
- Ignoring inheritance tax planning: Money in a pension is normally outside your estate for IHT purposes, making pension contributions doubly tax-efficient
- Making rushed decisions: Take time to consider your options. There is no deadline to invest inherited money
- Not considering the full picture: Pension contributions should be part of a broader financial plan including ISAs, debt repayment, and emergency savings
Inheritance and Your State Pension
Receiving an inheritance does not directly affect your State Pension entitlement, which is based on your National Insurance record. However, if you use inherited money to retire early or reduce your working hours, you may stop building NI qualifying years.
If you plan to use an inheritance to take a career break, consider paying voluntary NI contributions to maintain your State Pension entitlement.
When to Seek Professional Advice
Consider professional financial advice if your inheritance is significant (typically over £50,000), if you have complex tax affairs, or if you are unsure about the best strategy. A pension adviser can help you maximise tax relief, plan contributions across tax years, and integrate your inheritance into your broader retirement plan.