February 19, 2024
Do you know why the removal of the Lifetime Allowance (LTA) could make pension funds even more attractive for wealth transfer?
Pension funds (usually) don’t attract inheritance tax (IHT)
With regard to IHT, pension funds usually don’t form part of your estate when you die. Whatever fund value remains at the time of your death, can be passed on to your beneficiaries and retain their tax-efficient status as pension funds. The tax position for a beneficiary withdrawing money for themselves can be complex so it is best that they speak with an IFA or accountant about their specific circumstances.
How to ensure your pension funds are passed on efficiently
If you want specific people to receive your pension funds, it is important to let the pension provider know and to understand what options are available.
Pensions vary in terms of the death benefits they offer and the flexibility allowed. If the only option offered by your pension provider is a cash payment to your beneficiaries then you might consider switching to an alternative provider.
Whether you have a Will or not, it is important to nominate beneficiaries using an ‘expression of wishes’ form that your pension provider will supply. The provisions in your Will usually don’t control who inherits your pension funds. A binding instruction may not be effective for IHT, so making a written nomination helps your pension provider to know your wishes.
Life changes, and the beneficiaries you originally specified when you started saving into your pension may not be the ones you would choose today. (We’re not talking about some Agatha Christie-esque plot twist involving dramatic re-writing of Wills here – simply that births of children and grandchildren, marriages and divorce can change who you want to inherit.) Ultimately, it is the trustees of the pension scheme who have discretion over who inherits pension death benefits, but by keeping things up-to-date you can ensure that your wishes are understood.
Whilst pension death benefits are not typically subject to IHT, there may still be tax implications for your beneficiaries, so it’s important to consider all the angles.
It’s a good idea to talk through the options and potential impact with an IFA, and review your arrangements whenever tax rules change. Professional advice will help give you and your loved ones peace of mind, knowing that you have minimised future tax liabilities for your estate and beneficiaries.
If you’d like the help of an IFA to review your plans for wealth transfer, find a Talis IFA here.
Note: A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
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