Passing On Your Pension

Last month we considered the tax treatment of pensions on death and the call from the Institute for Fiscal Studies (IFS) for reforms to remove the tax advantages which can see pension funds passing down the generations tax free.

While the rules do remain however, let’s make sure your pension is set up to be passed on in the most efficient manner, to exactly who you want to benefit.

To recap, passing on your pension plan is one of the most tax-efficient ways to move assets to your children and grandchildren.

Previously, it was only possible to pass your pension onto a spouse, or a financially dependent minor. Now there are no such restrictions.

Also, pension savings aren’t normally considered part of your estate and are typically exempt from inheritance tax. This huge tax advantage is then wasted when the pension fund defaults to your spouse, who takes it all tax free…into their estate, which is then subject to IHT at a later date.

A complete tax own-goal.

Let’s take a look at some things you’ll want to bear in mind about passing on your pension fund.

Note. We are talking here about your money purchase pension fund, be that a SIPP, a personal plan, a workplace pension or a drawdown pension. We are not talking about any annuity or final salary pensions, where only an income can only be passed down to a spouse.

1. Find out what death benefits your pension provides

Pension rules and regulations can be very complex. When considering what you want to happen with your pension when you die, you need to know what type of pension you have, and the pension’s rules for what happens on your death.

Some pensions have automatic rules for what happens on your death. For example, they only give an income to a dependent (such as your spouse) on your death, as indicated with annuities above, but also on older occupational schemes such as EPPs and SSASs. Other pensions have more flexibility on who you can leave your pension to and how they can access it.

2. Complete a nomination of beneficiary form

For pensions that let you choose who you can leave your money to, you can complete a form called a “nomination of beneficiary”. This lets your pension scheme know who you want to leave your money to. In certain cases the scheme may pay to people not nominated if they feel that this is the best thing to do.

Completing a nomination of beneficiary form is important. If your beneficiaries aren’t on the form they may not be able to keep the money in a pension, which offers tax advantages. Instead, they may simply get a lump sum paid to their bank account.

Knowing what the scheme can offer can then help guide how you write the nomination of beneficiary form. For example, some providers will allow you to leave instructions alongside naming beneficiaries. This is perhaps the strongest tool where you can give the trustees an either or, giving your spouse the opportunity to give up the rights and pass it not your children or grandchildren.

For younger beneficiaries, you can also stipulate that the funds remain within the pension and are used to provide an income in the future, preventing early depletion.

3. Know what tax may be due

Your pension may be subject to Lifetime Allowance charges based on the total value of all your pensions you have used in your lifetime and passed on after your death. The standard Lifetime Allowance is £1,073,100 and any amount over this could be subject to tax - although you may have or could qualify for a Lifetime Allowance protection that is higher than this.

There can also be income tax considerations for your loved ones. This can depend on what age you are when you die, or when your money is paid out.

And further to this, while pensions are usually free from inheritance tax there can be instances where it would apply.

How we can help

The good news is that with my help, you’ll be able to understand the rules of your particular pension, and look at what actions you can take to reduce any negative impacts for your family.

Your pension is likely to be one of your most valuable assets and can provide much needed income for your loved ones once you’re gone.

Let me help you make the most of this valuable asset. I can also review how your pension fits in with your overall intergenerational financial plan to help you transfer your wealth to the next generation in the smoothest and most tax efficient way possible.