Features

Passing on your pension when you die

Your pension can be a valuable part of inheritance-tax planning, says David Prosser.

939_MW_P29_pensions

Pensions can be a valuable part of inheritance-tax planning.

Most pensions have an unusual status under the inheritance tax (IHT) rules. They don't count towards the total amount you are allowed to pass on to heirs without any tax being due. For this reason, defined-contribution (DC) pensions (where benefits are uncertain and depend on asset-price performance) are a valuable IHT planning tool; income from a final-salary pension or an annuity, by contrast, usually dies with you or your spouse.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

The bottom line is that savings you have invested in a DC pension plan can be bequeathed to anyone you choose. Importantly, you do this by completing an "expression of wishes" with your pension provider rather than through your will.

It doesn't matter whether you've started taking money from your savings using an income-drawdown plan or whether you're still building up your fund. Either way, the money won't be considered part of your estate for inheritance-tax purposes.

Advertisement
Advertisement - Article continues below

Your beneficiaries may still have to pay some tax. Usually, if you die before the age of 75, your pension savings can be passed on completely tax-free; your beneficiaries can use the money however they wish with no tax to pay as long as they take it within two years.

By contrast, if you die aged 75 or over, your beneficiaries normally pay income tax on what they receive at their highest marginal rate of income tax. The way the system is set up has some important implications for IHT planning. It makes sense, from an IHT point of view, to run down savings such as money in an individual savings account (Isa) before you start using your pension money. 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.

You should also discuss tax planning with your heirs. If you're passing on pension savings after your 75th birthday, they may need to think carefully about how to take the money in order to manage their income-tax bill. It may not make sense to take it all in one go. By contrast, non-taxpayers will pay nothing on inherited pension savings, even from someone over the age of 75. You could take advantage of this by leaving money to grandchildren, for help with university costs or a house deposit, for instance.

Advertisement

Recommended

Visit/519223/how-can-we-raise-more-money-in-tax
Economy

What are the best ways of raising more money in tax?

Given that whoever wins next week's election will be going on a massive spending spree, we're going to need to raise at least some of that money throu…
5 Dec 2019
Visit/518715/what-are-the-biggest-mistakes-investors-make-when-it-comes-to-tax
Investment strategy

What are the biggest mistakes investors make when it comes to tax?

The tax implications of an investment are something we rarely consider until after the event. That could prove to be an expensive mistake, says Domini…
27 Nov 2019
Visit/516603/how-tax-has-shaped-the-course-of-human-history
Economy

How tax has shaped the course of human history

Taxation is as old as civilisation itself. But how much is too much? Dominic Frisby looks at how taxation, war and society have evolved together over …
16 Oct 2019
Visit/516479/one-example-of-the-madness-of-our-inheritance-tax-rules
Personal finance

One example of the madness of our inheritance tax rules

Our system of inheritance tax is needlessly complicated, says Merryn Somerset Webb. Here, she outlines one way in which the well-off could save over £…
14 Oct 2019

Most Popular

Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/520575/20-predictions-for-the-2020s
Investments

Where will markets be in 2030? Here are 20 forecasts for the 2020s

A lot has changed in the last ten years – stockmarkets soared, technology transformed our lives and politics has changed beyond measure. Here, Dominic…
14 Jan 2020
Visit/520338/how-much-the-state-pension-will-rise-by-this-year
Personal finance

How much the state pension will rise by this year

While Boris Johnson promised to hold a full budget within 100 days of his election victory, many of the details of next year’s state pension increases…
10 Jan 2020
Visit/520553/money-minute-wednesday-15-january
Economy

Money Minute Wednesday 15 January: UK inflation and house prices

In today’s Money Minute, we look ahead to the latest UK inflation and house price figures, plus we have Germany’s GDP data for 2019.
15 Jan 2020