Passing On Your Pension

What kind of pension or pensions you have will determine what can happen to any remaining funds after your death. Here is a quick look at different types of pensions and what the options are for inheritance planning.

The State Pension At current time, if you are married or in a civil partnership, widow(er)/surviving partner may be able to inherit some of your entitlement to a state pension. As the rules relating to state pensions are set by the government, this can, however, change at any time.

Defined Benefits Pensions Often known as final-salary pensions, these schemes will have their own rules about what happens to your pension in the event of your death. This may well depend on whether or not you have already started to access it. If you are, or have been, a member of one of these schemes, then it is a good idea to check what these rules are so you can decide what steps, if any, need to be taken in order to ensure that your loved ones are protected in the event of your death.

Defined Contributions Pensions – Annuities There are essentially two ways to pass on your annuity in the event of your death. One way is to buy an annuity which makes specific provision for a spouse’s pension. Obviously annuity providers are going to take account of this requirement when deciding how much income to offer for your pension pot, hence you are almost certainly going to be offered less than you would have received without equivalent provision. An alternative would be to opt for an annuity protection lump sum death benefit. In this scenario, if the income drawn from the annuity is less than the original purchase price thereof, the difference is transferred to your designated beneficiary. While this option will almost certainly increase the price of the annuity compared to an equivalent product without this protection, it is also almost certainly cheaper than opting for an annuity with a spousal pension since the provider’s liability is limited to the purchase price of the annuity.

Defined Contributions Pensions – Income Drawdown Since April 2015, it has been possible for holders of pension funds which have been designated for income drawdown, to pass their remaining assets to whomsoever they please in a tax-efficient manner by using a vehicle called Nominee Flexi-Access Drawdown. The Nominee can, in turn, use a vehicle called Successor Flexi-Access Drawdown to pass on any remaining assets to their designated heirs and so on for as long as there are assets to transfer (assuming the regulations stay as they are now). The huge advantage of this approach is that, like a life insurance policy which is placed into a trust, the pension pot is kept out of the deceased’s estate and therefore avoids a (potentially hefty) IHT bill. This may be of particular importance to pensioners who also own property as the price of even a relatively modest home can soon gobble up an IHT allowance. As part of pensions freedoms, the government has also removed the hefty 55% “pensions tax”, which decimated the nest eggs left to surviving loved ones. As rules currently stand, if the holder of the pension fund dies before their 75th birthday, their pension fund can be passed on without any form of tax being payable. This continues down the line as the assets are passed from person to person. For example, if both the original saver and the first nominee die before their 75th birthday, the first successor will inherit the remaining assets without paying tax on them. Once the pension holder reaches their 75th birthday, any withdrawals are treated as standard income for the purposes of tax.