Pensions – Inheritance Tax efficient bequests

31st October 2023

Most people are aware that pensions are a tax efficient method of saving for retirement. However, fewer know that they can also be a tax efficient way of transferring wealth to a future generation.

If you already have an annuity or a final salary pension, there is not a pot of money to pass on, but depending on the rules of the specific scheme, it may transfer to your surviving spouse to pay a pension for the remainder of their life.

If you have a private pension, for example a Self-Invested Personal Pension (SIPP) or a stakeholder or workplace pension, this could generally be passed on to your beneficiaries tax free. If you are under 75 when you die, your beneficiaries can usually draw from the fund without paying Income Tax. If you are over 75 when you pass away, your beneficiaries will be taxed on their pension at their marginal rate of tax. There are proposals to align the Income Tax treatment of inherited pensions, irrespective of the age at death. From 2024, it is proposed that all beneficiaries will suffer Income Tax at their marginal rate.

Pension funds can usually be a significant and valuable part of someone’s estate. As part of IHT planning, some people may find it beneficial to spend their non-pension assets first before dipping into their pensions. To discuss your pensions and IHT, please get in touch.

This article is taken from our Inheritance Tax and Probate Briefing 2023. Read more here.

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