Prioritising the power of pensions

A very tax-efficient solution for passing on your wealth

Passing wealth through the family, for most, is an important part of their estate preservation planning process. Pension funds are typically free of Inheritance Tax provided the scheme trustees/administrator has discretion over the payment of death benefits

Passing on your wealth

As well as supporting you through retirement, pensions can be a very tax-efficient way of passing on your wealth. You can even pass on your pension to help give a family member or dependent more money to retire with.

Money left in your pensions can be passed on to your dependents or family tax-efficiently, depending on the type of pension it is, you nominating who you wish to receive the money (your beneficiaries) — your Will won’t do this for you; and your age when you die — before or after the age of 75.

Passed on in certain circumstances

Defined contribution or money purchase pension savings can be passed on in certain circumstances. These include savings you have made through a workplace defined contribution pension scheme and savings in individual plans such as Self-Invested Personal Pensions (SIPPs) or stakeholder pensions, making them very useful when it comes to Inheritance Tax.

If you die before age 75 and haven’t accessed your pension, your beneficiaries have two years to claim your entire pot tax-free. If you’re older than 75 when you die, your defined contribution pension won’t be subject to Inheritance Tax; however, your beneficiaries will have to pay Income Tax at their usual rate.

Tax-free cash allowance

You need to remember any money you take out of your pension becomes part of your estate. This means it could be subject to Inheritance Tax. This includes any of your tax-free cash allowance which you might not have spent. Some older-style pensions may be inside your estate. So it’s important to check if Inheritance Tax might apply your savings.

How can you pass your pension pot through the family without Inheritance Tax?

Consider setting up a defined contribution pension if you haven’t already, as this will give your beneficiaries the most flexibility.

Locate your old workplace pensions and weigh up the pros and cons of transferring them into one scheme.

This can make things a lot easier for your beneficiaries to manage and will ensure they have access to all of your pension savings.

Notify your pension provider of who your beneficiaries are and keep this information up to date.

While it’s not essential in order to pass along your pension, drawing up a Will can help remove any doubt when it comes to dividing your estate and respecting your wishes when you die.

Prioritise pension plans

The exemption of pensions from Inheritance Tax gives rise to several types of planning opportunities. Most obviously, if your non-pension assets (such as the cash in your Individual Savings Accounts) are likely to leave your heirs facing an Inheritance Tax bill, it may be appropriate to prioritise pension plans for your future savings.

You may even be able to move existing savings and investments into your pension plan to take them out of the Inheritance Tax net.