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Pensions as an Inheritance planning tool.

Pension have not always been the investors favourite investment vehicle. However, changes to pension rules have turned them into a useful estate planning tool to the extent that we sometimes do not take an income from them in retirement.

To explain this new use for pensions we should first look at their structure. Pensions are a type of trust and as such do not form part of your assets. In fact, pension assets don't belong to you, but to your pension provider; who hold them on your behalf.

This is useful from an inheritance point of view as HMRC can not tax your estate on assets you don't own.

As always, things are not straight forward and therefore you do need to get advice. The basics are that in the event of your death before age 75, your beneficiaries would receive your pension funds without any tax applied. Post 75, they would be taxed on the value of the funds they receive at their marginal tax income rate. As such a non tax payer may receive some funds free of tax and a basic rate tax payer may pay 20% tax. Higher and additional rate tax payers would not benefit.

 

Additionally, someone receiving pension funds from a deceased person who passed away before age 75 could receive an income from the pension [following transfer into their name] free of income tax. This means that this scheme is now behaves similarly to an ISA. Ironically we have seen some people pay 40% income tax on their pension income with their spouse receiving the same income free from income tax.

These benefits don't stop there. When the initial beneficiary dies, the funds can be passed down to any person nominated by the beneficiary; meaning that pension funds can now be passed down the generations without affecting their pension lifetime allowance.

It is important to seek advice as the lifetime allowance charge will be applied at age 75 even if your don't take pension benefits.


 
 
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