I wrote previously how many people view inheritance tax as the unfairest tax of all. I explained that a previously efficient will could be out-of-date due to the new inheritance tax residence nil rate band. The same can be true of existing pension nominations.
Pension Death Benefits
Pension funds are absurdly tax efficient. Pension funds do not form part of your estate (in the majority of circumstances) and can be kept in force indefinitely. Under recent rule changes, if pensions are set up appropriately, they can be bequeathed to pensions in the name of nominated beneficiaries. This can happen at death at any stage.
Thus, pension funds are a source of funds that are:
- outside of your estate,
- can be drawn down whenever you so wish (usually after 55), and
- can be bequeathed to nominated beneficiaries at any time in the future without any inheritance tax bill.
Furthermore, any ‘inherited pensions’ will not form part of the recipient’s estate nor will it count towards his/her Lifetime Allowance.
So in terms of inheritance tax planning, there is merit in leaving your pension fund as your “fund of last resort” and drawing down upon other assets to supplement income throughout retirement years.
For example, if you were to have £500,000 of investments and £500,000 of pension funds, there is merit in drawing down the investments first. This is for the simple reason that the value of investments left on death (or second death) is subject to inheritance tax whereas the value of pension funds is not.
Thus pension planning should form an integral part of your inheritance tax planning strategy. It is imperative to regularly review your pensions to ensure that the contracts into which you are invested offer the most flexible death benefit options and that you have made the appropriate nominations.
Inheritance tax issues should be a regular agenda item when carrying out a financial planning review. Although it may not be possible to avoid the bill completely, for many people there may be scope to reduce the bill by many thousands of pounds!
Please contact me should you wish to review your financial planning strategy.