29th May 2015
New freedoms allow savers to pass their pension on to their loved ones, potentially tax free, so how do you do it?
The pension reforms have offered some real inheritance tax (IHT) planning options for retirees, who are looking for ways to pass on their wealth to the next generation.
Under the new death benefits rules, if a person aged over 75 dies leaving a pension pot, that money can be passed on to anyone they choose at a reduced rate of 45%. The 45% rate is only for the 2015/16 tax year and after this the death tax is charged at the rate of income paid by whoever benefits from the money.
If the person benefitting from the money pays no income tax then the money passes on tax-free.
If a person dies before age 75, their entire pension pot is passed on tax-free.
However, Mike Morrison, pension expert at AJ Bell, said passing money on may not be completely straightforward and there are some pitfalls to avoid .
The first point to consider is to make sure pension plans are with providers that allow individuals to take advantage of the new flexi-access drawdown policies that allow you to pass money on. Some providers will not offer access to these policies and a saver will have to transfer to a pension scheme that does.
Individuals should ensure their wishes are kept up to date so the right beneficiaries inherit their pensions. This is done by completing a ‘nomination/expression of wish’ form.
Savers should also be aware of the tax trigger points, including:
– age 75, when the pension pot reverts from being untaxed to taxed on death
– the tax position of the beneficiaries for death post age 75
Morrison said if flexi-access is required then make sure the full range of possible beneficiaries is on the nomination.
‘The trustees have discretion as to who they pay a lump sum to, but can face restrictions as to who they can nominate to receive an income,’ he said.
He added: ‘To get the benefit of the new rules it is important to follow some of these key guidelines. It is also crucial that this area is kept under regular review.
‘Even if you get all the above right, beware of the hidden IHT trap – the headlines might say that pensions are IHT-free but if a pension holder is aware that they are in serious ill health then care must be taken with any pension contributions or perhaps more importantly, any transfer of pension benefits from one provider to another.
‘In such circumstances, if the pension holder then dies within two years of the transaction then there is the possibility of an IHT charge. The older the client when they transfer, the more chance statistically of death within two years so care is needed.’