Pensions are job benefits that provide a source of recurring income during retirement based on a worker's years of service and salary. When a retired worker passes away, pensions and other retirement benefits can pass on to loved ones. It is possible to inherit a pension from a parent, although retirement benefits typically pass on to surviving spouses before children.
If your father passes away with a pension, you could end up inheriting it depending on the details of the plan. Pensions and other retirement accounts let the owner name a beneficiary who can receive proceeds of the plan in the event of death. According to Nolo, most pension plans require the spouse to be named as the beneficiary if the plan participant is married unless the spouse signs a form to give up the right to inherit the account.
Retirement benefits can allow participants to name a secondary or contingent beneficiary in addition to the main beneficiary. The contingent beneficiary is entitled to inherit a benefit plan or account if the primary beneficiary is dead when the participant passes away. Children are often listed as secondary beneficiaries who receive benefits if the spouse is no longer alive.
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The payment option your father chooses to use to receive pension income affects inheritance. If he chooses a single life annuity payment plan, the pension disappears when he passes away. A joint and survivor annuity provides benefits for the life of the plan participant and can be inhered by a beneficiary. A third type of payment scheme, called a certain and continuous annuity, provides guaranteed payments to the participant or a beneficiary for a specific number of years. If the participant lives beyond the certain period, he continues to receive income payments for life, but they stop when he passes away.
When you receive pension income as a survivor or beneficiary, you generally have to report that income on your personal tax return just like the original participant would have reported it. This means you usually have to pay taxes on the pension income and other retirement benefit distributions you inherit at your ordinary income tax rate.
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