Many people want to pass their assets onto their son or daughter when they die. A pension is a tax-efficient way to do this as your pension is not part of your estate and therefore is exempt from Inheritance Tax.
Inheritance Tax is a tax that is charged on all assets in your estate such as your house, cash and other assets. In the 2024/25 tax year Inheritance Tax is charged at 40% on any assets over the Nil Rate Band of £325,000. If you leave your house to your children or grandchildren you will also benefit from the Resident Nil Rate Band which is an additional allowance of £175,000 per person or £350,000 per couple that is free from Inheritance Tax. This means that couples can effectively shelter £1,000,000 from Inheritance Tax.
The Inheritance Tax benefits of passing on a pension to your loved ones is one of the predominant reasons that a financial adviser at Four Wealth Management may encourage you to utilise other assets for income when you retire rather than using your pension as your only source of retirement income straight away. The more you can leave in your pension, the more you can leave to your loved ones free from Inheritance Tax.
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Will my children pay income tax if I leave my pension to them?
If you die before the age of 75 then your beneficiaries will not pay any income tax when they withdraw money from your pension. However, if you die at or after the age of 75 then your beneficiaries will pay income tax on any withdrawals that they make at their own marginal tax rate.
Have you taken your 25% tax-free lump sum from your pension?
Once you reach the age of 55 you can take 25% of your pension as a tax-free lump sum. However, if you die on or after your 75th birthday without taking this 25% tax-free sum then your beneficiaries will need to pay their marginal rate of income tax on the whole pension pot including this amount that you could have access free from tax.
Therefore, it might be more tax-efficient to take this tax-free lump sum yourself before you reach the age of 75. If you do not need the money then you can pass this onto your loved ones yourself. Lump sum gifts will be free from Inheritance Tax after seven years.
The rules around gifting are complex, a financial adviser at Four Wealth Management can work with you to create a tax-efficient plan to gift money to your loved ones.
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Let your pension provider know your wishes
As a pension is not part of your estate, they are not included in your Will. Therefore it is important to fill out an Expression of Wish form to let your pension provider know who you want to receive your pension when you die. You can nominate more than one pension beneficiary. Your pension provider can then share your wishes with your executors.
Find out how to leave your assets to your children tax-efficiently
Pension rules and tax allowances are extremely complicated and the rules and tax reliefs change often. A financial adviser at Four Wealth Management can help you to understand how you can leave your assets to your children in the most tax-efficient way.
Your first meeting with a financial adviser will simply be to establish your aims and objectives and look at your current circumstances. The meeting will be no longer than an hour and can be at your home address, at one of our offices or on zoom.
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The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
