Inheritance tax and pensions

Pensions are one of those subjects that many people tend to put off until they get close to pensionable age, when all of a sudden, they become very important. When you have money in your bank account, it’s always tempting to think that you should spend it, and make the most of it while you have it, rather than investing in something that you won’t benefit from for many years.

However, if you want to make sure that you and your loved ones get the most from your assets, investing in a pension could lead to significant tax benefits.

Passing on your hard-earned cash

As independent financial advisers, we would always look at your individual financial situation. But, whatever stage of your life you’ve reached, or your financial circumstances, it’s almost always the case that investing in a pension is a good idea. In particular, the younger you are, the more scope you have to build a healthy pension pot, so you can retire when – or even earlier than – you plan to.

As well as providing you with the means to enjoy a long and happy retirement, pensions are also a good investment because, in most cases, whatever is left in your pension pot when you die can be passed on to your loved ones without incurring any Inheritance Tax. And if you die before the age of 75, the payments they receive won’t incur any Income Tax, either.

Because payments from a pension fall outside of the estate they are not distributed via your Will. Therefore, to ensure that payments are made in line with your own wishes it is important that you tell your pension provider who you want to receive your pension pot when you die, by completing an Expression of Wishes form. In the overwhelming majority of cases the provider will distribute benefits in accordance with this document, giving you peace of mind that your loved ones will be looked after.

Lifetime pension allowance

The amount of money you can put into your pension pot tax-free is capped at £1,073,100. This means that if you have more money in your pension than this at any time, it will incur some form of tax when anyone draws funds from the pot. So, if you draw money as a lump sum from your pension when it has more than £1,073,100 in it, there will be a lifetime allowance charge of 55%, which is deducted by your pension provider or administrator and paid to HMRC before you receive your payment. If you decide to take an income from your pension, either as an annuity or as drawdown, there’s a 25% tax charge, on top of any Income Tax you may have to pay.

The same rules apply if your pension pot has more than the lifetime allowance in it when you die and someone else benefits from it. They will still have to pay the same charges, depending on whether they receive the money as a lump sum or as an income.

If you already have an extremely generous pension pot, talk to us about the most tax-efficient way of investing any surplus funds you have.

Find out more

Pensions can be an effective way of saving for the future – both for yourself and your loved ones. Contact us and we’ll take a look at all your existing investments and give you measured advice on the best approach to pensions, so you can prepare for a happy retirement…

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.