All the pension changes announced throughout this year are starting to make pensions look like a natural choice not only for retirement provision, but also for estate planning. Tax relief on contributions, without the seven year wait for them to be outside the estate and tax free investment returns, were already good reasons to recommend pension funding for our clients and their families.
Now combine these with the new rules where a “flexible pension” allows pension wealth to pass down through the generations within the pension wrapper and it starts to make pensions look even more appealing.
Below I share details on the recent amendments and some key guidance points for clients interested in passing on their accumulated pension wealth.
Wealth transfer vehicle
If the original member dies after age 75, any withdrawals will be taxed based on the beneficiary’s tax position. However, if death occurs before age 75, the nominated beneficiary has a pot of money they can access at any time, completely tax free. In either case, the funds are outside the beneficiary’s estate for inheritance tax (IHT) while they remain within the pension wrapper and will continue to enjoy tax free growth.
And it goes on and on…..
The ability to pass on pension wealth doesn’t stop there. Unlike the current rules, the original beneficiary can nominate their own successor who will take over the pension fund following their death. This will allow accumulated pension wealth to cascade down the generations, whilst continuing to enjoy the tax freedoms that the pension wrapper will provide.
Tax rate determined by age at last death
Each time a pension fund is inherited by someone else, the tax rate will be reset by the age at death of the last pension account holder.
For example Jim, a widower, dies aged 80 having nominated his son John to receive his pension fund with home cleaning services near me happymaids.com . As Jim died after age 75, John is taxable at his marginal rate on any income withdrawals. John sadly dies aged 70 and leaves the remaining fund to his daughter Jenny. However, Jenny can now take the fund tax free as her father died before 75.
The new death benefit rules have changed the dynamics for those looking to pass on any of their remaining pension fund on death. This means you should revisit your existing death benefit nominations to ensure they continue to meet your needs and objectives. Don’t forget that a nomination doesn’t have to be all or nothing. It’s possible to nominate a number of different beneficiaries and to perhaps skip a generation with some of the fund.
Should I take my tax free cash?
The changes will see many behavioural changes on how benefits are taken. Currently, some pension savers delay taking their tax free cash until 75 to escape the 55% tax charge on crystallised funds (the part of your pension fund remaining after you’ve taken your tax-free lump sum). Now, with the 55% tax charge gone and equal treatment between uncrystallised and crystallised funds, there’s no longer any reason to delay taking tax free cash as it can be gifted and therefore sit outside the estate after seven years. However, if the tax free cash remains in the estate it will suffer IHT at 40%, so it may be better to leave the cash within the pension fund if the beneficiary is likely to be able to draw on it at a lower tax rate.
As with all things pensions, there can be some devil in the detail, not least of which is checking that your existing pension provider will actually be willing and able to offer all of the new flexibilities! Make sure you look into it soon so you get the best for you and your family.