Pensions are no longer just a tool to provide income and capital in your retirement, they’re also a fantastic way to pass wealth down through the generations free from inheritance tax (IHT).
So who can benefit?
Everyone. Historically, most people will have named their spouse to receive their pension assets on death, but now, under the new rules, funds can be passed on to anyone you choose, without IHT liability. This means that the benefits can now be spread much wider.
It is important, however, to keep all your options open in order to make the most of this fantastic planning opportunity.
What are our concerns?
We are now starting to see a number of pension cases coming through which are being tested against the new rules, and this is helping us better understand some of the issues.
One significant problem we have noticed is that when pension assets are passed to someone who has not been specifically named on the nomination form (i.e. the form which states to whom your pension assets should be paid on your death), the pension ‘wrapper’ is lost. What this means, in turn, is that although the beneficiary still receives the cash lump sum, they lose the protection from IHT.
Why is this an issue?
If pension assets are passed on as a cash lump sum rather than within a pension wrapper, they immediately become part of the beneficiary’s estate for IHT purposes.
If that person then wants to carry out their own IHT planning, they will have to work within the usual IHT rules, which typically means that any gift of assets will take seven years to fall out of their estate (for IHT purposes).
If you would like to discuss your financial planning options, please contact us with any questions you might have. You can do this by calling our head office on 0131 220 0000, or by emailing us at firstname.lastname@example.org. or you can also follow us on Facebook, Twitter or LinkedIn.