How to use your pension to cut your inheritance tax

Most of us prefer not to think about Inheritance Tax.

After all, we don’t have to pay it.  Inheritance Tax, or IHT, is levied on our estates – the property, money and possessions we leave behind. But, although we don’t pay it ourselves, it can take a big chunk out of what our loved ones receive.

At Continuum we are looking at how you can use your pension to cut your inheritance tax liability – and leave more of your wealth to your loved ones rather than the taxman.

The taxman is waiting…

It is easy to ignore IHT, because we think it is only aimed at rich people. But the threshold for Inheritance Tax is just £325,000.  Go past that figure, which a growing number of people will do and the taxman can help himself to 40% of everything above the threshold, leaving your loved ones very much worse off. Britons paid £3.1bn of inheritance tax from April-September 2021.


Will your loved ones lose out?

Not sure what IHT might cost your beneficiaries? Find out with a free initial consultation with a Continuum expert.

When you die, your estate may be charged inheritance tax depending on the total value of your assets including property, cash and belongings. The amount of inheritance tax collected by the government will vary depending on the total value of your estate and who your beneficiaries are.

If you have an estate worth less than £325,000 inheritance tax won’t be charged. If your estate is worth more but you leave everything to your spouse, civil partner or a charity, inheritance tax won’t apply.

But if you want to leave it to your children, it will. You may be able to leave them your home. There are certain allowances which will help you pass on a property you have used as a main residence, which could let your children inherit a home worth up to £1 million without paying IHT – but even that concession is starting to look less than generous in many parts of the country,

The good news, however, is that your pension could help you cut your potential inheritance tax bill.

Why your pension can avoid IHT

Pensions almost always fall outside your estate for inheritance tax purposes; they are not included in the calculation of whether your estate is worth more than £325,000, the level at which inheritance tax typically becomes payable.

Even better, the pension system makes it very simple to pass on unused pension savings to your heirs, particularly with defined-contribution or money-purchase plans. The rule used to be that if someone dies before taking any pension benefits before age 75, the fund remained outside their estate for inheritance tax purposes and there is no exit charge on funds paid to their nominated beneficiaries.

However, under the old rules, for those who died after reaching age 75 or after they had begun to take benefits, there was a flat 55% exit charge on lump sums paid out to beneficiaries.

Now, if you die before the age of 75, your heirs are entitled to all of the money with no tax to pay; if you die after age 75, your heirs still get the cash, but will need to pay income tax on it at whatever rate they normally pay. Even if you have used your pension savings to buy an annuity – an insurance contract paying you a regular income for life – you may still be able to pass on cash to your heirs.


Our succession planning service

Ensuring your loved ones are provided for is vital. Our succession planning service is designed to help you – and them. Call us for details.

However, to do so, you must set the annuity up in the right way when you buy it, selecting options that allow you to pass on payments in the form of income or a lump sum.

Getting some expert help

Your wealth – and the future of your loved ones after you have gone are too important to be left to chance.  The rules affecting IHT are complicated and getting the details absolutely right is essential.

At Continuum we can provide expert help to help you minimise inheritance tax, not just by using your pension, but with detailed planning to take full advantages of all the concessions available.

Simply call us at Continuum for the advice you need.

The Financial Conduct Authority does not regulate Taxation and Trust advice & will writing.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable retirement strategy, you should seek independent financial advice before embarking on any course of action.

IHT receipts surge 29%

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