Since the arrival of the pension changes in April 2015 most of the focus has been on the greater freedom to take your money when you stop working. However what many people have overlooked are the new death benefit rules that also came into play last year. There is now much more flexibility over what happens to your pension when you die and how it is passed on.
Your pension can stay invested and be passed on
Under the new rules, when you die your pension can stay invested while your beneficiaries take as much money as they need through income drawdown. This means the pension won’t fall into your or your spouse’s estate when it comes to Inheritance Tax. If you die before age 75 the income is paid tax-free, otherwise it is taxed at the beneficiary’s marginal rate of Income Tax.
If your beneficiaries don’t need to take any income from your pension it could remain invested and be left for the next generation in the same way. The money will keep its tax benefits and can be passed on to subsequent beneficiaries (such as a child or grandchild) indefinitely without ever being charged with Inheritance Tax.
Does your pension provider give you the option?
If you are not already in a pension that gives flexible access it is unlikely that your beneficiaries will have this option. With these providers your beneficiaries must usually buy an annuity or take the entire pot as a lump sum – which could create a large Inheritance Tax bill for the beneficiaries further down the line.
Many providers aren’t offering this new freedom. It is important to double check how your pension is treated on death. If you’re unsure about how your current provider deals with pension death benefits you should contact them directly. If you are already in flexi-access drawdown you may still need to sign a new nomination form for your beneficiaries to benefit under the new rules.
Speak to a financial planner about your pension
Our financial planners can review all your pensions and explain your current pension death benefits. They can also help you with your wider estate planning and managing Inheritance Tax.
This article was previously published on Tilney prior to the launch of Evelyn Partners.