Pensions, IHT and beneficiaries

Pensions can be a useful tool in inheritance tax planning, helping you to leave money to your children or anyone else you choose.

That is because pensions have a special status under tax rules that allows them to be passed on without becoming part of your estate for inheritance tax purposes.

These opportunities exist only with defined contribution pensions – that is those where you save money to build a pot that is invested.

As well as being exempt from IHT, with defined contribution pensions, depending on how old you are when you die, your beneficiaries may receive the whole amount without them owing anything to HM Revenues and Customs.

The key age is 75.  If you die before your 75th birthday, then any pension can be passed on tax free.

Your beneficiaries can spend it when they want without incurring a tax bill – as long as they take it within two years.  They do not have to be over 55, the normal cut-off age for taking a pension.

After your 75th birthday, there can be tax implications.  At this stage, those inheriting will be taxed on the money at their marginal rate so they must be careful how much they take and when.

John BaxterComment