Pensions and inheritance tax planning are closely linked. Inheritance tax is up to 40% of the value of your estate over the nil rate band of £325,000. You may also be eligible for the residence nil rate band of up to £175,000 per person if you leave your house to a direct descendent such as a child or grandchild.
Inheritance tax is calculated when you pass away and your executors must settle any inheritance tax liability before they can distribute any assets in your estate.
The majority of personal pensions are free from inheritance tax as pensions are outside of your estate.
This includes defined contribution pensions, self-invested personal pensions (SIPPs), and workplace pension schemes which are not subject to inheritance tax upon the pension holder’s death.
This is the reason that many individuals use pensions as a form of inheritance tax planning. They take income from other assets when they retire which are inside of their estate such as ISAs or other investments so that they can pass on their pension to their loved ones free from inheritance tax.
How much tax will my beneficiaries pay when they inherit my pension?
If the pension owner dies before the age of 75 then any pension assets can be passed on tax-free to beneficiaries, regardless of the size of the pension pot.
If the pension owner dies after the age of 75 then the beneficiaries may be subject to income tax at their marginal rate when making withdrawals from the pension.
The above typically applies to defined contribution pensions such as workplace pensions and private pensions. Defined benefit pensions (also known as final salary pensions) may be subject to different taxes. Typically, defined benefit pensions only pay 50% to your spouse when you pass away and there is nothing to be inherited by other family members.
How to reduce your inheritance tax liability in the UK
While pensions are typically exempt from inheritance tax, it is essential to consider the tax liabilities of other assets within the estate. There are tax-efficient ways that you can move other assets outside of your estate such as using trusts. Trusts can provide you with flexibility and control over how and when the assets are distributed to your beneficiaries while reducing your overall tax liability.
Seek professional advice
Estate planning and inheritance tax are complex areas of financial planning and expert advice can be invaluable.
To help you to make the best decisions for you and your loved ones, you can book a no-obligation meeting with a financial adviser at Four Wealth Management. Meetings can be at your home address, at one of our offices or on zoom.
Book a meeting online now or call us on 0117 973 0500.
The value of a pension 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 is dependent on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority.
