Last updated on August 13th, 2019 at 08:49 am
If your pension is in a ‘defined contribution scheme’ (the type where you pay into a pension pot that is invested), passing on your pension to someone (or several people) can be an efficient way of avoiding inheritance tax, particularly if your other assets are sufficient that they will attract the tax.
How to use your pension to reduce inheritance tax
If you die before you are 75 (before your 75th birthday) you can leave your pension to a nominated person (people), tax free, as long as they draw it within two years of your death. If they draw down any of the pension more than two years after your death, they will pay tax at their prevailing rate. The heirs to your pension do not need to be aged 55 or over to draw the pension.
If you die after the age of 75, your heirs will have to pay tax on the amount they draw at the rate at which they normally pay tax. They can spread taking the pension over several years to minimise the tax they pay. For example, if they earn nothing else and draw £11,500 a year (current personal allowance) from the pension, they will pay no tax. A basic rate tax payer will pay 20%, but if the amount they draw a year takes them above the basic rate limit, they will pay 40% tax. This, however, is still more cost effective than the potential of paying inheritance tax at 40% on the whole amount of the pension if it is left within a will.
Spread your pension
Anne Rogers, head of the wills and probate department
You could also use your pension to help grandchildren, nieces, nephews etc. onto the property ladder, tax free, by spreading your pension between them all.
Of course, you need to remember that this method of sharing your pension will only be beneficial to your heirs if your estate is likely to be worth more than the nil rate band.
For further information on inheritance tax, have a look at our web pages, or contact our experts now to make an appointment to discuss your personal requirements.
