Ensuring the best ways to pass along your wealth to future generations is the primary purpose of estate preservation planning. There are many ways to go about it, but one avenue that you might not have even thought about pursuing is pensions. Normally, pension funds are free from Inheritance tax as long as the scheme trustees or administrator have discretion over the payment of death benefits. Learn more about this unconventional method below.
This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice.
Pensions to pass on your wealth
The main function of a pension is to financially support someone during their retirement, but pensions can also be used as a tax-efficient way of passing on your wealth, and can even be used to fund someone else’s retirement!
Depending on the kind of pension you have, money left over in your pension fund can be passed on to your dependents in a tax-efficient manner. With the right kind of pension, you can nominate a beneficiary to receive the money since it can’t be done in your will. It will also depend on whether you die before or after age 75.
Special circumstances
If you have a defined contribution or money purchase pension, savings can be passed on in certain circumstances. Luckily, savings you have that were made from contributions through a workplace defined contribution pension scheme, savings from individual plans such as Self-Invested Personal Pensions (SIPPS) or stakeholder pensions are included, which makes them extremely useful when it comes to Inheritance Tax.
When you die also matters because if you die before the age of 75 and you have not accessed your pension, your beneficiaries can claim the entire pension pot tax-free within two years of your passing. However, if you are older than 75 when you die, the defined contribution pension is not subject to Inheritance Tax, but your beneficiaries will be required to pay Income Tax at their usual rate.
Keep in mind: any money that you take out of your pension will become part of your estate and therefore subject to Inheritance Tax, including any tax-free cash allowance that you might not have spent yet. You might also have some older-style pensions included in your estate if you haven’t consolidated them for ease so be sure you check whether or not IHT will apply to any savings.
Steps to passing on your pension without IHT:
- Set up a defined contribution pension to allow your beneficiaries more flexibility.
- If beneficial, consolidate multiple pensions into one scheme. This will make it easier for your beneficiaries to manage and ensure they won’t miss any errant pension funds.
- Make sure you have notified your pension provider who your beneficiaries are and keep them abreast of any changes.
Make your pension a priority
The fact that most pensions are exempt from IHT presents a variety of planning opportunities. For example, prioritising pension plans will leave your heirs in a better place than other assets that are subject to inheritance tax. You might even be able to transfer existing savings and investments into your pensions to benefit from the exemption.
Planning for the next generation
No matter how hard you work when you’re here or how much wealth you amass, the truth of the matter is that you can’t take it with you. If you want to ensure that your wealth is preserved for future generations and passed on as efficiently as possible, consider how a pension can help you. To learn more, contact the experts at Dental & Medical Financial Services today.
