Is my pension subject to inheritance tax?

Thinking about what happens to your family once you have passed on is something that many do not enjoy, but it is an important consideration. If you’re no longer around, you want to ensure your loved ones are taken care of as much as possible.

Pensions, along with being there as support through retirement, can be an effective way for people to pass on their wealth. However, there are numerous points to consider when passing on your pension, and many people wonder if their pension is subject to Inheritance Tax. The good news is that as well as being a great way of saving for retirement, pensions can be a tax-efficient way of passing on your legacy to your loved ones – like children and grandchildren. Generally, pensions fall outside of a person’s estate, making them exempt from Inheritance Tax.

How is your pension passed on?

If you have money left in your pension pot, you might be wondering how this is passed on to family members or beneficiaries. This depends on three main points:

• The pension type
• Nominating those you want to receive the money
• Your age when you pass on

Pension type

With regards to pension type, it’s vital you understand the features present in your plan. The good news is that most current, flexible pensions are equipped with what are known as “death benefits”. These benefits kick in when you die, and they assist with ensuring your leftover money is given to your intended pension beneficiaries.

What if death benefits are not part of your pension plan? In this situation, you could consider transferring your pension to a plan that includes them, such as iSIPP. A pension transfer, in this day and age, is not the arduous, costly task you may think it is – and it can all be sorted within a couple of weeks.

Nomination

Nominating a beneficiary – or beneficiaries – is a key step in efficiently passing on your pension. You may feel this isn’t necessary if you already have a will in place, but this doesn’t cover the money in your pension. You need to let your provider know who you would like to receive your pension money once you die.

With a defined contribution scheme in place, you can choose to nominate anyone to be your beneficiary. It doesn’t even have to be one single person. It can be an organisation, such as a charity.

If it’s from a defined benefit pot, the pension can often only be paid to the deceased person’s dependent, for instance, a wife, husband, civil partner, or child under the age of 23. While the rules for a specific pension scheme might allow it to be paid to someone else, it could be classed as an unauthorised payment – and be taxed by up to 55%.

Age

The age you die at will usually factor into whether your leftover pension pot is taxed or not. If you die before reaching the age of 75, it will often be tax-free. If you’re over 75, however, income tax may be applied to any money paid to your beneficiaries (assuming they begin to draw an income from the money).

Inheritance Tax and my pension: how does it work?

With the above points in mind, there are certain situations where tax can be applied to your pension when you pass on. However, where does your pension stand with Inheritance Tax? The government sums it up as follows:

“In most cases, any pensions you have can be passed outside of your estate and so won’t be subject to Inheritance Tax.”

That’s right: you will tend to avoid having Inheritance Tax applied to your pension. While it will impact your savings, belongings, property, and any other assets left when you pass on, your pension pot is not part of the process.

Due to this, having a pension is a tax-efficient way to pass on your legacy. Your beneficiaries will receive more money, comparatively speaking, when matched against any cash resting in your bank account, for instance.

By not being an element of your taxable estate, your pension fund is an investment that will pay off more for those who receive it once you’ve passed on.

Disclaimer 

The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

This notice cannot disclose all the risks associated with the products we make available to you. When making your own investment decisions it is important you understand that all investments can fall as well as rise in value and it is possible you may get back less than what you have paid in. You should also be satisfied that any investments you choose are suitable for you in the light of your circumstances and financial position. You should seek financial advice if you are not sure of what’s best for your situation.