Passing on Your Pension

20 June 2023

PASSING ON YOUR PENSION SAVINGS TO LOVED ONES

You’ve worked hard and saved throughout your life (so far), growing your pension pot so you can enjoy a happy retirement.

But how do you make sure any remaining pension funds go to your loved ones when you’re no longer around?

Thanks to changes in the way pensions are taxed, there’s a great opportunity to leave some, or all, of your pension to family members in a tax-efficient way.

SOME RULES AND ADVICE ON PENSIONS

  • If you pass away before the age of 75, your beneficiaries won’t pay any tax on any pensions savings you’ve left them.
  • Wealth built up in a pension can be passed on as inheritance without losing the tax shelter (a tax minimisation strategy, not to be confused with the illegal practice of tax evasion), or any tax charge, whether withdrawals have been made or not.
  • Happy 75th Birthday! When you turn 75, your pension assets become taxable, but only at the marginal rate of income tax (the percentage of tax paid on earning for the next pound earned).
  • For your beneficiaries to be able to dip into their inherited pension pot as and when they want, you can specify you’d like to leave your remaining pension fund as a ‘drawdown pension’. This is one of the most flexible ways to make regular withdrawals or take lump sums from the pot, and the rest of your cash stays invested in the pension, continuing to grow tax-free.
  • There are complexities if you’ve bought an annuity pension (a retirement income product that pays a regular, guaranteed income for a fixed term of for the rest of your life). It can’t be ‘passed on’ as such, but you can arrange for your loved ones to continue receiving an income from your annuity after your death.

FORWARD-THINKING PENSION PLANNING

  • Check your pension plan allows your loved ones to inherit your pension fund as a ‘drawdown account’ – you might need to make an amendment to your plan if it doesn’t.
  • Make sure your pension provider has up-to-date details of those who you’d like your pension fund to be passed onto. You might need to complete an ‘Expression of Wish’ form, as your written Will won’t cover this.
  • There’s no limit to the number of beneficiaries you have, so decide on the proportions for each person. Beneficiaries can also be causes or charities that are close to your heart.
  • Consider nominating a trust rather than an individual – money invested this way is taxed differently and can offer greater levels of control than simply passing on your pension to someone else.
  • Make sure your beneficiaries know to contact your pension scheme after your death to find out how they can claim your remaining pension benefits and how much tax they may need to pay.

WHAT TAXES APPLY WHEN YOUR LOVED ONES RECEIVE YOUR PENSION?

Whether you have a workplace pension, private pensions or a personal pension such as a Self-Invested Personal Pension (SIPP) or stakeholder pension, defined contribution pension schemes are a tax-efficient way of passing on your wealth.

They aren’t part of your taxable estate, therefore Inheritance Tax doesn’t apply. However, other taxes such as income tax, may apply.

  • If you die before the age of 75 – your beneficiaries will inherit your defined contribution or defined benefit pension pot tax-free.
  • If you die after the age of 75 – your beneficiaries will pay income tax on anything they withdraw from your pension savings.

The amount of tax they’ll need to pay depends on your individual circumstances and theirs.

HELP WITH INHERITANCE PLANNING

You’re likely focused on growing your wealth for the here and now, but having your affairs in order so you can pass on as much of your wealth as possible to your heirs can bring great comfort.

Your pension, which sits outside your estate, is just one aspect of the wider Inheritance Tax Planning (OIHT) picture. IHT can be complex, but at Fortus, we’ve helped hundreds of individuals with their investments and future planning.

We also advise on IHT-mitigation strategies to allay any ‘tax trap’ fears. Through the use of trust-based and/or business relief investments, we can help save your estate significant sums of money, meaning more of your hard earned capital goes to your chosen beneficiaries; your family and loved ones.

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An important note: the value of investments can go up and down, so you may not get back what you invest, plus, tax treatment depends on individual circumstances and tax rules may change in the future. Content correct at time of publishing.

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