Wealth transfer through pensions

A robust vehicle largely insulated from Inheritance Tax

In the realm of estate preservation, the strategic transfer of wealth to subsequent generations is paramount. Notably, pensions serve as a robust vehicle for such transfers, largely insulated from Inheritance Tax, provided the discretion in death benefit payouts lies with the scheme’s trustees or administrators.

A tax-efficient legacy
Pensions not only bolster one’s financial security in retirement but also stand as an efficient conduit for wealth transfer. They offer a means to significantly enhance a family member or dependent’s financial stability in their later years.

The capacity to pass on pension funds tax-efficiently hinges on several factors: the pension’s nature, the designation of beneficiaries – which a Will cannot accomplish – and the age at which one passes away, with the age of 75 being a critical threshold.

Conditions for pension transfer
The transferability of defined contribution or money purchase pension savings under certain conditions underscores their value in Inheritance Tax planning. This encompasses contributions to both workplace-defined contribution schemes and personal arrangements like SIPPs or stakeholder pensions.

Beneficiaries can inherit the entire pension pot tax-free if the pension holder dies before reaching 75 without having withdrawn from the pension, provided the beneficiary enters beneficiary drawdown and they claim it within two years. For those passing away after 75, while the pension remains exempt from Inheritance Tax, the inherited sum is taxable for the beneficiaries at their standard Income Tax rate.

Role of tax-free allowances
It’s crucial to be aware that any withdrawals from your pension integrate into your estate, potentially attracting Inheritance Tax. This includes portions of your tax-free cash allowance that remain unutilised.

Additionally, certain older pension formats may fall within your estate for Inheritance Tax purposes, necessitating a review to ascertain potential tax liabilities on your pension assets.

Pension planning for Inheritance Tax efficiency
To navigate the passage of your pension pot through the family without incurring Inheritance Tax, consider the following steps:
• Establish a defined contribution pension to maximise flexibility for your beneficiaries.
• If appropriate, consolidate former workplace pensions into a single scheme to simplify management for your beneficiary and ensure comprehensive access to your pension savings.
• Inform your pension provider about your designated beneficiaries and maintain this information’s accuracy.
• While not mandatory for pension transfer, creating a Will can clarify the distribution of your estate and ensure adherence to your final wishes.

Prioritising pensions for future savings
The exclusion of most pensions from Inheritance Tax liability presents various planning opportunities. Particularly, prioritising pension contributions for your future savings could be advantageous if your non-pension assets are likely to subject your heirs to Inheritance Tax.
Transferring existing savings and investments into your pension may also remove them from the Inheritance Tax calculation, offering a strategic advantage in estate planning.

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