One of the less well-known facts about the 2015 pensions freedoms is that your pension scheme has the potential to provide income for second generation beneficiaries and potentially sit outside your estate when you die.
The upside is that your pension could potentially be passed to your dependents if you have nominated a beneficiary, thereby potentially preserving family wealth. The downside is that with no beneficiary, your pension could form part of your estate so may be subject to Inheritance Tax (IHT). This is due to payments on death being at the discretion of the pension trustees (scheme administrators).
Passing on your pension pot – IHT
Making sure that you nominate someone to be the beneficiary of your pension after you die is critical. With many people seemingly uncertain of whether they have nominated a beneficiary, it is important to beware of the implications. If you do not nominate a beneficiary, your pension could potentially form part of your estate and therefore potentially could be subject to IHT. This is not always necessarily the case. It is important to check that your “expression of wishes” – the term used to refer to nominating beneficiaries – is up to date with your pension provider and is continually reviewed particularly if there are changes to your personal circumstances. Check the scheme rules as well. Some providers allow only lump sum drawdown to beneficiaries which is not necessarily good from an IHT point of view as it effectively enters the estate all at once.
Who gets your pension – a dead cert?
Many people believe that their will covers their expression of wishes as regards their pension. This is not the case, so it is possible that that a former partner could still be the beneficiary of your pension if you have been divorced or are separated. The expression of wishes form is filled out when you first open your pension scheme and many people simply don’t even remember doing it, hence the reason that they don’t think about changing it as time goes on and situations change.
What happens to your pension at 75 tax-wise?
The tax treatment of any pension savings that could be passed on when you die changes at age 75. If you die before the age of 75, your pension pays the beneficiary of your choice either a tax-free lump sum or a tax-free income via income drawdown or an annuity.
If you die after age 75, the beneficiary pays income tax on any withdrawals from the fund, whether as a lump sum or income drawdown, at the beneficiary’s marginal rate. In a case like this it needs to dealt with carefully as it could incur tax at rates of 40 % or 45 %.
Recap – passing on your pension
It is important to review your pension so that:
- It does not form part of your estate when you pass away.
- Your pension goes where you want it to go.
- That it doesn’t accidentally go to a former partner.
- You are not constrained by a scheme that only provides a lump sum payment on death and it cannot be taken as drawdown.
If you are unsure about this, I will be happy to help you find out and discuss your retirement plan. Until next time thanks for reading
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This post was written by Huw Johns