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Improving the tax-efficiency of your estate with pensions and life insurance

We all know the importance of making a will.  It is the only way you can ensure that your estate goes where you want it to go and is used to protect your family.   

Estate

Inheritance tax

Your estate is everything that you own, including money, investments, property and possessions.  If your estate is valued at more than the prevailing nil rate band (NRB) – £325,000 at present – inheritance tax (IHT) is payable on everything above that amount.  However, if it includes your home and that is passing to a direct descendant (children, stepchildren, adopted/fostered children or grandchildren) you have a further allowance; the residence nil rate band (RNRB) of £175,000.  This means that you can leave up to £500,000 IHT free, or up to £1 million for married couples or civil partners.

Anne Rogers, partner and head of our private client team says:

“I am regularly asked “what is the most tax-efficient way to pass on my estate?”. My response is always to start with a good estate plan.  Whilst we do not advise on pensions and life insurance, you would need to speak to a pension advisor or financial advisor, both of these can help to reduce the amount of IHT your estate has to pay.”

Pensions

These days, most pension funds fall outside of an estate, so should not attract IHT.  If you die before the age of 75, income tax is not payable either. However, if you die after the age of 75, income tax is payable by the pension beneficiary’s at their highest income tax rate on any withdrawals.  Funds can be withdrawn as a lump sum or income but can be different depending on what type of pension you have, so you should check with an expert to find out how your pension is set up.

If your estate is large and likely to attract IHT, you could make additional contributions to your pension from your savings or investments (which attract IHT), being careful not to exceed your annual pension allowance – the amount you can put into a pension and still receive tax relief.  This is currently the lower of £40,000 or 100 percent of your qualifying earnings. You may also wish to ensure that your pension pot does not exceed your lifetime allowance (currently £1,073,100) – the amount you can draw out of your pensions during your lifetime (effectively the maximum amount you would want to have in your pension pots) without incurring an extra tax charge.

Estate

Anne Rogers, partner and head of our private client department

Anne says:

“If you take money out of your pension – even if you don’t spend it – it becomes part of your estate and so could be subject to IHT, so you might wish to spend your other assets first and preserve your pension as long as you can.”

Life insurance

Unlike most pensions, the majority of life insurance policies that pay out a lump sum or income to someone upon your death are part of your estate and so may attract IHT if your estate exceeds the NRB (and RNRB if applicable), although, there is usually no income or capital gains tax to pay.

Putting your life insurance policy into trust, so that it pays directly to your beneficiaries will mean that it is not part of your estate and will not attract IHT. You can do this at the time of taking out the policy or at any time afterwards.  You should speak to your financial advisor about doing this. You will need to appoint a trustee, such as a solicitor, family member or someone you trust to manage the policy on behalf of your beneficiaries. As well as not attracting IHT, other benefits of a life insurance policy in trust are that you can name the beneficiaries of the trust and policies often pay out quickly.

You can use a whole of life insurance policy that stays in place until you die to cover IHT that you envisage will be payable on your estate.  This can be useful if probate is prolonged as IHT is payable six months after the person’s death and interest accrues on any amount not paid within this time frame.

Anne says:

“Getting advice, both from a lawyer and a financial adviser, regarding the most tax-efficient way to plan your estate, is vital. Our private client advisors have a wealth of experience in estate planning.  Why not contact them now.”

You have landed on this page as Watson Esam has merged with Graysons

You can read more about the merger here. Graysons will be pleased to help with your enquiry. Please visit our web pages or contact us directly on 0114 358 9009

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