Pensions and how they provide effective legacy planning

The recent Inheritance Tax (IHT) Report from the Office of Tax Simplification (OTS) has put the IHT treatment of pension death benefits firmly back under the legislative spotlight. But IHT is only part of the pension death benefit tax equation.

The 2015 pension freedom reforms changed the role that modern, flexible Defined Contribution (DC) pensions can play in effective wealth transfer. This makes them one of the most flexible, tax-efficient legacy planning vehicles available. But it all hinges on having the funds in the right pension, with the right nomination at the right time.

  • Less tax – The old 55% death tax has been consigned to the history books. Flexible death benefits are now tax-free on death before 75 – or taxed as the beneficiary’s income on death aged 75 or over (when/ if income is taken)
  • More choice – Any nominated beneficiary can now inherit pension wealth and keep it inside the pension wrapper as a drawdown pot that can be accessed whenever funds are needed – this option is no longer restricted to dependants. But making the most of this flexibility relies on getting the right nomination in place
  • IHT protection – Most modern pensions offer robust protection against IHT. But older pensions may still be considered part of your estate. Please speak to us if this the case and we can review this for you
  • Inherited drawdown flexibility – Scrapping the old income limits, combined with the much wider choice of beneficiaries, means inherited drawdown creates a flexible, easy-access legacy that can be cascaded down the generations outside the IHT net. It never counts against a beneficiary’s lifetime allowance (LTA). But be aware that it’s only likely to be an option under a modern, flexible pension

Please note, this article is for information only and does not constitute investment, pension or tax advice. Tax legislation and rules are subject to change.

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