How your pension can help leave a legacy

NOTE: This post is more than 12 months old, and the information contained within may no longer be accurate.

Did you know that pensions can be a fantastic inheritance tax planning tool?

Due to changes in legislation your beneficiaries are able to ‘inherit your pension’ rather than receive a lump sum. This means your pension remains outside of your estate for inheritance tax purposes, your beneficiary is then able to pass on any residual fund to a ‘Successor’ and this can continue until the fund is exhausted.

This is a fantastic planning opportunity and means you are able to pass money down the generations without incurring a tax charge.

Whilst these changes were introduced in 2015 not all pension plans have moved with the times and may only allow a lump sum payment upon death. This means the value would fall inside the beneficiaries’ estate and potentially liable to inheritance tax when the beneficiary subsequently passes away. This does happen and that is currently ongoing whereby a significant tax charge has been incurred. This has been referred to the Ombudsman but does show it can happen!

The tax treatment of these benefits depends upon your age at death. If you die before 75 any benefits can be drawn by your beneficiaries’ tax free. If you die over the age of 75 any benefits would be taxed at your beneficiaries’ marginal rate of income tax. An important point to remember is that the beneficiary does not have to be the minimum retirement age in order to take any benefits.

Upon the original beneficiaries’ death, the tax treatment of any benefits still remaining in the inherited pension would be passed on and importantly would be based upon the age of the original beneficiary and so on until the pension fund runs out.

It is worth reviewing any existing plans to ensure that you are aware of the options available to ensure any potential tax charge is avoided.  In addition, there have been significant changes to the way the benefits can be taken which provides total flexibility when you come to take your benefits.

In summary, current pension legislation provides you with much greater flexibility and options, both in terms of how the benefits are taken and how they are treated upon death. However, just because the legislation allows it does not mean that your pension contract has been up-dated to facilitate these changes. Therefore, it is worth reviewing your existing plans to ensure they remain suitable.

If you have any arrangements that you feel need reviewing please contact me. Our initial meeting is at no cost to yourself and will provide an opportunity to see whether your plans are suitable for your current needs and future objectives.

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26 Jan 2024

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