For most people, contributions to their pension will form a large portion of their life savings. As such, pensions need to be considered very carefully when estate planning. If you are in the fortunate position of having more pension funds than you need to provide yourself with for a comfortable retirement, leaving your pension to your loved ones can be a tax efficient way to pass on your wealth. The current pension regulations allow for flexibility in how a person can pass on their pension pots, although transferring your pension is strictly regulated.

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Transferring your pension

Pensions can be transferred to another provider or scheme but they cannot be transferred between individuals or gifted as with other assets, as pensions have a set legal structure. Your pensions can only be transferred between individuals in exceptional circumstances, such as in the case of a divorce or civil partnership settlement, or in the event of death.

Expression of wish

Most personal pension arrangements allow anyone you wish to nominate to inherit your pension fund when you die. In order for this to happen, you need to complete an expression of wish with your pension provider. This is a statement that tells the provider who you choose to receive your pension savings. You can split a pension pot between many beneficiaries, meaning you can divide your pot between your family in the event of your death.

Unlike your other assets, your pension does not form part of your estate in your Will. Therefore, keeping your expression of wish up-to-date with your pension provider throughout your life is vital.

What are the tax implications of transferring your pension?

As your pension is not considered part of your estate, and is therefore exempt from inheritance tax, it can be a tax efficient way to leave your assets to your spouse or children. However, there are instances where your beneficiaries will need to pay income tax on the money they get from your pension.

  • If you die before age 75, beneficiaries will not pay any income tax when they withdraw money from the pension.
  • If you die on or after the age of 75, beneficiaries will pay income tax on any withdrawals they make at their marginal rate (the highest rate of income tax they pay).
  • The lifetime allowance for all of your pensions is currently, £1,073,100. Any amount in excess of this will receive a tax charge. But, if your pension is transferred to a beneficiary, this will not count towards their lifetime pension allowance.
  • 25% of your pension pot can be taken as a tax-free lump sum but, if this is left in the pension and not claimed, if you die after the age of 75 the whole pot will fall under the beneficiary’s marginal rate of tax. Therefore, it could be more tax efficient to take the lump-sum and distribute as gifts in line with inheritance tax allowances.

What about defined benefit, salary-related pensions and annuities?

Most employer schemes do offer beneficiary options, but they can differ significantly and so they need to be considered case by case.

An annuity will usually cease paying income when you die, but certain joint, guaranteed period and capital protected annuities are designed to continue paying out income, or to provide a lump sum after you die to a person chosen by you.

Talk to us

Pension, estate and inheritance tax planning can be challenging, especially if you have a number of savings and assets to deal with. It is always a good idea to talk to a financial adviser who can navigate your financial aims in the most tax efficient manner to benefit you and your loved ones. If you would like to talk to us about transferring your pension or any of the matters in this article, please get in touch.

PLEASE NOTE: Grosvenor Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority. The value of investment can go down as well as up and you may not get back the original amount you invested. Tax treatment is dependent on individual circumstances and may be subject to change. Tax planning is not regulated by the Financial Conduct Authority.


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