Increasingly, people are passing on their pension pot as part of their legacy and using other assets for a retirement income. This is because pensions can fall outside of an estate and therefore are exempt from Inheritance Tax so can be used as a tax-efficient way to transfer wealth to children or grandchildren.
If you leave your remaining pension pot to your family or other beneficiaries, they will only have to pay their marginal rate of income tax. However, if you die before the age of 75, any money held in your personal pension or defined contribution pension can be left to your beneficiaries as a tax-free income or tax-free lump sum.
Who can inherit my pension?
You can nominate anyone as the beneficiary of your pension, not just your relatives. If your pension is in drawdown, your chosen beneficiaries can choose to receive your pension as a lump sum or as regular income payments.
However, some old pension schemes do not offer drawdown, if this is something you wish to consider you might need to look into a more modern pension scheme. A Financial Adviser at Four Wealth Management can talk you through your options.
How do I nominate a beneficiary?
Your pension is not included in your Will. Therefore, it is important that you make your wishes for transferring your assets known. You should fill out an Expression of Wish form for your pension so that details of your executors and your wishes are recorded. You can nominate multiple beneficiaries and decide how much you want each beneficiary to receive. You can change your Expression of Wish form if your circumstances change at a later date. If you have more than one pension it is important that you fill out a form with each provider.
Pensions are complex and the tax rules and reliefs change frequently. It can be hard to decide what is best to do with regards to your own finances let alone when deciding what is best for your family’s financial future. Having a Financial Adviser can be invaluable when it comes to pensions.
At Four Wealth Management, your Financial Adviser can help you to review your pension’s performance and decide the most appropriate option for you and your family when it comes to you requiring income after you retire. Your adviser would also let you know of any changes that could affect your individual circumstances and will recommend any changes that should be made to your portfolio when necessary.
Take your 25% tax-free lump sum
You should take your 25% tax-free cash lump sum before you turn 75. If you do not then it will be taxable at a later date. It is important to note that your chosen beneficiaries are not eligible to take the 25% tax-free sum so if you do not take it yourself then you would lose this tax benefit.
If you take your tax-free lump sum but don’t use it before you die then it will become part of your estate, for example if the lump sum is left in cash in your bank account. This will then mean that you beneficiaries may have to pay Inheritance Tax on the lump sum. This is also the case if you were to take your whole pension pot in one go and keep it in cash.
Start your estate planning today
To discuss the most tax-efficient way to leave your pension and other assets to your loved ones, book a no-obligation financial review meeting with one of our financial advisers.
Book online here or call us on 0117 973 0500.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.