Pension legislation dramatically changed back in 2015. Gone are the days where your pension savings automatically die with you or your spouse/civil partner.
The introduction of Pensions Freedoms, in addition to how you take your income, has given people more control and flexibility to pass on defined contribution or, personal pension, savings to any beneficiaries of your choice.
As well as supporting you through retirement, personal pensions can also be a very tax-efficient way of passing on your wealth. This is because, unlike other investments, your personal pension isn’t part of your taxable estate. You can even pass on this type of pension to help give a family member or dependent more money to retire with.
Money left in your pensions can be passed on to your dependents or family tax-efficiently, called death benefits, depending on:
The type of pension it is
You nominating who you wish to receive the money (your beneficiaries)
Your age when you die — before or after the age of 75
Personal pensions usually let you pass on your pension to your beneficiaries, tax-free if you die before you reach 75. After age 75, your beneficiaries may pay income tax on anything they take out of the pension.
However, pension providers were not forced to adopt the new freedom legislation on older pension contracts. These older types of pension schemes still have the old rules prior which restrict your choice as to whom to leave your benefits to, and it is therefore important to check that your existing pension contract is positioned correctly to benefit from these tax advantages.
If your pension doesn't have flexible death benefits
You could think about potentially transferring your personal pension into one that does give you a full range of death benefits. However, this is a decision that should be taken very carefully and might not be right for everyone, for example if you're in ill health. The pension might also have important benefits or guarantees that you could lose by transferring. Seek the advice of an independent financial adviser to review your options to see which is the best for you.
Another aspect to consider is that the money in your pension isn't covered by your will. You need to tell your provider who you wish to be considered as your beneficiaries. This is covered in a Death Benefit Nomination Form.
You also need to bear in mind that any money you take out of your pension will become part of your estate. This means it could then be subject to Inheritance Tax. This includes any of your tax-free cash allowance which you might not have spent. This is explained further in our Guide to Inheritance Tax & Estate Planning
It is also why it is tax-efficient to keep your savings in a pension fund if you have other savings to provide income in retirement, and passing down your savings to future generations is important to you.
So next time you receive your pension statement, please avoid taking it at face value, and instead seek financial advice to help understand what the actual value is to you and your loved ones.
At Armstrong Watson our quest is to help our clients achieve prosperity, a secure future and peace of mind. We can provide a full review of your pension arrangements, including the death benefits, and discuss options and opportunities available to you.
Please get in touch if you would like to discuss your plans for retirement with a member of our financial planning team.
