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14/03/19Using your pension as an inheritance

When it comes to planning how your estate will pass to your loved ones, there could be a crucial element that you’re missing; your pension. While you’ve probably thought about who you’d like to inherit your home, investments and savings, pensions are often forgotten about.

It’s easy to see why, after all, while you regularly make contributions to your pension you can’t access it. As a result, it often ends up being an afterthought during the estate planning process. However, when you consider that your pension contributions will typically benefit from tax relief, employer contributions and investment growth over your career, it can be a sizeable sum to leave loved ones. When you look at it from an estate planning perspective, it can make sense too.

Why is using a pension to create an inheritance efficient?

The amount involved isn’t the only reason to consider where you’d like your pension to go should something happen. It’s also a tax-efficient way to pass on wealth, particularly if an estate may be liable for Inheritance Tax (IHT).

Money that’s left in a pension can usually be inherited free from inheritance tax. Should you die before the age of 75, money within a pension will go to beneficiaries free from income tax if they decide how they’ll access the funds within two years. If you die after the age of 75, the beneficiary will pay Income Tax on the money received at their marginal rate.

In contrast, IHT is usually paid at a rate of 40% on an estate that exceeds the nil-rate bands. As a result, using a pension to pass on wealth is often tax efficient and can help more money go to your loved ones. The same benefits apply if you’re taking an adjustable income from the money that remains in a pension. However, once you withdraw money from your pension any unspent funds will be considered part of your estate for IHT purposes.

Using your pension isn’t the only way to pass on wealth efficiently. You should also look at your wider estate plan to maximise other opportunities open to you alongside it.

How do you pass on your pension?

Usually, what you want to happen to your estate is set out in a will. However, this isn’t usually the case when it comes to your pension.

Who receives the pension savings of a member that is deceased is typically decided by the pension’s trustees. An expression of wish form is used to allow members to state who they’d like to benefit from their money should they die. These forms aren’t legally binding, however they let your wishes be known and will be used by pension scheme trustees during the process. You can fill in and update your form by contacting your pension provider directly.

Much like a standard will, it’s important to keep the person nominated to receive pension death benefits up to date. A survey conducted by Canada Life indicated that three in five 16-54 year olds had an out of date expression of wish. Just 39% confirmed their pension would go to their preferred beneficiary should something happen to them. An out of date expression of wish can mean significant delays in beneficiaries accessing pensions or even mean hard-earned savings go to the wrong person.

Andrew Tully, Technical Director at Canada Life, said: “An expression of wish form is a vital piece of the pension jigsaw. Anyone who has a pension would have been asked at outset to complete a form to nominate who should receive the benefits of the pension in the event of their death.

“Given the complexities of life and how things can change so quickly, it is hardly surprising that many people say their form is out of date. But that shouldn’t excuse the fact these forms are vital to help pension trustees and scheme administrators pay benefits not only quickly and efficiently, but to the right people. Think of them as a ‘will for your pension’ and ensure you keep it up to date if your personal circumstances change.”

If you’d like to discuss passing on a pension and wider estate planning, please contact us. We can help you minimise potential tax liabilities on your estate, ensuring as much wealth as possible goes into the pockets of loved ones, rather than the taxman.

Please note: The Financial Conduct Authority does not regulate Tax and Estate Planning.