The government have introduced valuable benefits…
- Basic and higher rate tax relief is available on contributions made – but mind the cap, please.
- The growth within a pension fund is normally quite free from any income tax or capital gains tax charge.
- When the time comes (normal pension age is currently 55, expected to rise to 57 in 2028) the member will be offered a tax-free pension commencement lump sum of up to 25% of the fund.
- The remaining 75% can be drawn down as required and charged to income tax as it is taken. Many members defer drawdown activity until such time as their mainstream income has ceased following retirement, thereby ensuring a lower tax charge.
- Less popular these days is the lifetime annuity scheme. The balance of the pension fund is used to purchase an annuity with an insurance company and normally this is payable until a member’s death.
- But the real magic lies with inheritance tax planning. The pension route has become particularly attractive when it comes to leaving money to your family. Effectively what happens is this:
- Pension savings are typically held in trust outside your estate and are thus free from IHT in most cases. This is because the pension scheme administrator normally has discretion over who inherits your pension pot. Again typically the administrator will be guided by your wishes, which can be stated on a simple expression of wishes form. Such forms are not legally binding (although rarely ignored) and therefore pension savings will not form part of your estate for IHT purposes.
- If you die before the age of 75 your pension savings can be paid free of tax to any beneficiary. It doesn’t matter whether you’ve started withdrawing money from the pension scheme or not. Your beneficiaries can withdraw your pension savings as a tax-free lump sum or keep the money invested in a drawdown plan and make tax-free withdrawals as and when they like. The drawdown investments will continue to grow tax-free until they are taken.
- If you die on your 75th birthday or later your beneficiaries can still inherit the balance of your pension savings but they will have to pay income tax on any money they withdraw. They can keep the money invested where it will continue to grow tax-free for as long as they like. There are no restrictions on the amount of income they can drawdown. For example they could take the whole pension pot in a single tax year if they want to but this could result in a large income tax bill.
- There are a number of more advanced pension schemes which provide IHT shelter for valuable assets that could otherwise be exposed to an IHT charge in the process of time. This is a specialist field and C&H Stedman will always point clients to a proven firm of pension experts with whom they partner.
- Pension savings are typically held in trust outside your estate and are thus free from IHT in most cases. This is because the pension scheme administrator normally has discretion over who inherits your pension pot. Again typically the administrator will be guided by your wishes, which can be stated on a simple expression of wishes form. Such forms are not legally binding (although rarely ignored) and therefore pension savings will not form part of your estate for IHT purposes.
Pension saving is an effective way of providing supplementary income in retirement and protecting capital from the ravages of IHT. It’s a valuable provision and worth careful consideration.
C&H Stedman
For more info, give us a call on 01442 202650
