Many of us don’t discuss our retirement plans with anyone other than our partner, and some of us don’t even do that.
We could be making a costly mistake.
Pension plans might have been secret a generation or two ago, when finances were simpler, and when discussing such things was considered either vulgar or a sign of weakness.
The world has moved on, finance in general and the retirement landscape in particular has become a lot harder to navigate – and your pension arrangements could have a big impact on those you care about.
Why sharing is caring
Money talk can be awkward but avoiding it may lead to much more awkwardness later. Your pension may be a key to your family’s future.
Conversations help your partner understand what life will be like after you stop work. They may (and should) have their own pension, and planning together can help ensure you both have the retirement income you need for the lifestyle you both want, and security when one of you dies.
Remember, under some circumstances it may be cost-effective to contribute to your partner’s pension as well as your own. Identifying those circumstances will probably require the help of a pension planning expert.
Working together can help you see how much you can afford to invest now, and the most suitable way to invest it. It will help boost your pension pot – and see how large it may grow. Talk about investments outside your pension – ISAs for example. Talk about whether you want to take a once in a lifetime cruise, downsize, buy a second home – but be sure to talk.
Understanding your income and commitments as a couple now will make it easier to meet your needs in the future.
You may also have to talk about how you will use your pension pot when the time comes. The main possibilities are drawdown – where your pension pot stays invested, and you draw on income as you need it, and the traditional annuity, where your pension pot is used to buy an income for life.
Which route you go down will affect your partner after you are gone. With drawdown you can pass unused funds on intact to your partner when you die. With a standard annuity, payments stop when you die, and remaining funds stay with the provider – unless you choose annuity protection. With this, if you die before receiving the full value of your annuity, the remainder is paid to your beneficiary.
You could also structure an annuity to support your partner after your death.
Deciding what approach is appropriate for you as a couple will need some discussion – and expert advice.
But you may need to involve more than just your partner. Your wider family may need to be aware of you plans – because they could have a big impact on them, too.
Talking to your wider family
Your children and possibly grandchildren may need to be part of the discussion. They might need to take control of your finances if you are no longer capable of managing yourself, and the decisions you make may affect what they will receive when you pass on. It’s vital you understand the value of your estate, have planned how to pass wealth on, and, importantly, communicate this with your family.
Remember, the Inheritance tax (IHT) thresholds have been frozen until 2030, dragging many more families into paying inheritance tax. This is charged at 40% of the wealth you leave above a set threshold. One way to mitigate this liability was to put as much as you could into your pension, which was not counted as part of your estate.
If you die before the age of 75, payments from pensions to beneficiaries are currently tax-free. If you die after 75, they may be taxed at the recipient’s marginal rate. But the government’s decisions to include pensions in the calculation of inheritance tax liabilities means from 2027, your pension contents could be subject to 40% inheritance tax.
There are ways to reduce your inheritance tax liabilities – but proper planning and involving your loved ones in making those plans may be essential.
So, what should you do?
Sharing your pension plans with loved ones can be a little easier if you also discuss them with an expert.
Talking to us at Continuum could help you understand the possibilities for making the most of your pension pot, the best way to enjoy the wealth you have created, and the most effective way to pass it on to your loved ones rather than the taxman.
It’s not just good to talk, it’s vital. Start your pension discussions by calling us today.
Inheritance Tax nil-rate band, residence nil-rate band from 6 April 2028 – GOV.UK
Autumn Budget 2024: Pensions to be subject to inheritance tax
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment or retirement strategy, you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate taxation and trust advice or will writing.
A pension is a long-term investment; the fund value can go down as well as up and this can impact the level of pension benefits available. Pension Income could also be affected by interest rates at the time benefits are taken. Pension savings are at risk of being eroded by inflation.
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.
Investors in ISAs do not pay any personal tax on income or gains. Levels and basis of reliefs from taxation are subject to change and their value depends upon your personal circumstances.
