There is slight but nagging worry about pensions. If you save all your working life you may not have much chance to enjoy the wealth you have built up.
Almost as bad is the thought of all that cash going to the insurance company. But the fact is it doesn’t have to. Your pension can be a valuable part of your estate planning – the arrangements we at Continuum can help you make to keep inheritance tax liabilities to a minimum.
Leaving your pension to your loved ones.
Most pensions can be passed on when you die, to anyone you select – not just your spouse or children.
However, the way you use your pension pot will go on to affect how it can be used by your beneficiaries.
If you have already purchased an annuity, where you receive an income for life in return for your pension pot, the death benefits will depend on the type of annuity you selected. If your pension is being paid as a Single Life annuity – still the most common as it maximises the income you will enjoy – payments will stop on your death.
If you bought a Joint Life annuity, which is designed to cover your spouse or partner as well, they will continue to receive the payments at the level you selected until they die. If you die before 75 their payments will be tax-free. If you expire after 75, they will be taxed as income at their marginal rate.
Another type of annuity is a Guaranteed Period of payment. With this, payments will continue to be paid for the agreed term to your nominated beneficiary even if you die before it.
With a Value Protected or Capital Protected annuity, your beneficiary will inherit a lump sum, which will be your pot minus any annuity payments made before your death.
Pensions and IHT
Pensions can be extremely tax efficient if you have an Inheritance Tax (IHT) liability. This is because pension cash which has not been spent on an annuity will remain potentially outside of your estate for Inheritance Tax purposes.
It could therefore make sense to spend other assets and to keep your pension pot intact for as long as possible.
You should complete a nomination form with the pension company to specify who you would like to receive the benefits on your death and what proportion.
If you die before 75, your beneficiaries can take the benefits out of the pension as a lump sum or income, as they prefer. They will pay no tax as long as your pot is below the lifetime allowance – but if you pass away after the age of 75, they will be taxed at their marginal rate.
How to bequeath your pension cash
There are two things to remember if you are thinking about passing on your pension.
The first is to instruct your pension provider how you want your pension to be used by completing an ‘expression of wishes’. Make sure your pension provider has up-to-date details of your beneficiary. If you have more than one pension, let all your providers know.
The second is to get some expert help. The position can be complicated, and there are some things you need to do to minimise what you pay. Almost all other forms of savings do count towards your estate, so reducing them and leaving your pension in place could be a way to reduce the IHT bill.
Understanding the finer points of tax and inheritance is a task for an experienced financial adviser, and their knowledge could make a huge difference as to who eventually receives your cash.
None of us know what is around the corner, so it makes sense to call us at Continuum and to get that advice without delay.
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 strategy, you should seek independent financial advice before embarking on any course of action.
The value of your pension and investments, and the income they produce, can fall as well as rise and you may get back less than you invested.
The levels basis and reliefs from taxation are subject to individual clients circumstances and may be subject to change.
The Financial Conduct Authority does not regulate taxation and trust advice & will writing.
pensionwise.gov.uk – Your pension when you die
citywire.co.uk – Intergenerational planning: stories of wealth transfer – 1st April 2019
moneyweek.com – personal finance