28 November 2014

Using Pensions to save Inheritance Tax

From April 2015 it will be easier to use a pension as a way of passing assets to beneficiaries on your death. Here's how it could work.

Previously pensions in their various guises provided a limited range of options when the pension's owner died. If an annuity had been purchased, payments may have been set up to continue to a spouse, or "value protection" could have been selected when the annuity was bought which would pass some value on - subject to 55% tax. Similarly if the pension was held in a drawdown plan the remaining value could be passed on to dependants - again subject to 55% tax.

The changes mean that if an individual dies before they are 75, their remaining pension value can be passed on to anyone - not just financial dependants as before, but anyone you nominate - and in addition there will be no tax to pay (including Inheritance Tax). Edit: The same also applies to income from an annuity, provided no payments had been made to the deceased.

If someone dies after 75, the same thing can happen but there will be a tax charge of 45% (initially anyway) if the pension is withdrawn as a lump sum, or it will be taxed as the recipient's income in the normal way if taken as an income, which can be done at any age. If the beneficiary does not need the value of the pension for themselves, they can pass it on to a "successor", facilitating multi-generation estate planning where appropriate.

Overall that means it is possible to use a pension as the vehicle to pass worthwhile value on to your beneficiaries but still keep access for yourself if needed for care costs later in life, for example.

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