Are pension funds subject to inheritance tax?

Pension legislation is forever changing, and this time it’s for the better! Gone are the days where your pension savings automatically die with you or your spouse/civil partner.

The introduction of “Pensions Freedom” during 2015 has given you the control and flexibility to pass on your defined contribution pension savings to any beneficiaries of your choice without being subject to inheritance tax.

However, not all pension products and administrators have adopted the new freedom legislation and it is important to check that your existing pension savings are positioned correctly to benefit from these tax advantages.

Do pension funds pay tax?

Savings within most modern defined contribution pension products fall outside of your “taxable estate” and are therefore not subject to inheritance tax on death. There are exceptions and you should check that your existing pension savings are positioned correctly to benefit from these tax advantages on death.

There are many different pension products available to you for saving tax efficiently for your future and this article specifically looks at defined contribution pensions and how these can be used to maximise the value you leave to your loved ones.

Historically, pensions have been seen as a tax efficient savings vehicle to provide you with income in retirement.

However, more recently investors are looking closely at how their income in retirement is structured, especially where there is potentially an inheritance tax liability on the assets that make up your taxable estate.

For some investors it may be sensible to consider drawing income or capital from assets within their estate first to meet expenditure requirements before drawing from the pension which is exempt from inheritance tax.

As mentioned earlier, savings within most modern defined contribution pension products fall outside of your “taxable estate” and are therefore not subject to inheritance tax on death.

This makes them an extremely attractive vehicle for passing on wealth to future generations under current legislation.

Do pension plans have death benefits?

You can inform the trustees of your pension who you would like to benefit from your pension by completing an “expression of wish” or “death benefit nomination” form.

We often recommend including the names of all potential beneficiaries to maximise the flexibility, this could include children and grandchildren for example.

It is important to remember that the trustees of your pension must retain discretion over who ultimately receives the value of your pension after your death, for the fund to be exempt from inheritance tax.

In our experience, most scheme administrators follow members wishes, unless there is a strong reason not to, although they are not legally bound to do this.

It is important to keep nominations up to date as circumstances and legislation can change.

How to transfer a pension?

Where a transfer between pension schemes is instructed and you were in ill health, it would be necessary to survive for a period of 2 years after the date of the transfer for the pension to automatically be exempt from inheritance tax.

Conclusions

1. Check your existing pension products to ensure these have adopted Pension Freedom legislation to allow maximum flexibility over your pension savings.
2. Make sure you have completed an expression of wish or death benefit nomination, for each of your pension arrangements.
3. Consider speaking with an Independent Financial Adviser who will be able to review your personal and financial position for you.

A pension is a long-term investment. The value of an investment and the income from it could go down as well as up.  The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

The Financial Conduct Authority (FCA) does not regulate estate planning or tax advice.