Let your Pension be your Inheritance

When the Chancellor announced that from April 2015 individuals wouldn’t have to pay the 55% tax charge currently applicable to pensions when they die, he opened up a fantastic opportunity to both benefit from tax efficiency now and also pass it on when you’re gone.

Under current rules, if you die before drawing your pension then all of the pension pot can be passed on to your family tax free as a lump sum. For those who had started to access their pension fund (by way of pension drawdown) the 55% tax charge would be paid if the pension was paid out as a lump sum, or a dependant could continue to draw income from the pension and pay income tax on it.

There are two significant changes under the new rules: –

1. Even once you have started to access the pension any remaining fund can now be passed on tax free as a lump sum; or, even better: –
2. The remaining fund can be passed on as a pension and the recipient will never pay tax, whether they take it as a lump sum now or draw an income from it.

Why, then, might someone choose to take the money as a pension rather than as a tax free lump sum?

Remember that pensions are extremely tax efficient. Growth of investments in a pension are tax free (no Capital Gains Tax payable) and the income generated is not subject to Income Tax (although dividend tax is payable). Investments in a pension are taxed much like NISAs, but the government caps how much an individual can save in a NISA, currently £15,000 per person per year, to limit the availability of these tax efficiencies.

Money in pensions is also not subject to Inheritance Tax, which can save you up to 40% more.

Imagine, therefore, that you could keep an investment in this very tax efficient environment, access lump sums or income at any time and never pay any more tax. Well that’s what’s being offered.

If you die with a pension you can pass it on to anyone you choose and they can access the money tax free any time they want. And when they die, if there’s any left, they can pass it on again.

There are different rules for those who die aged 75 or over as those who inherit will have to pay income tax on the money they take out, but this is still much less that the current 55%.

So consider your pension as a tax efficient savings scheme for you, your family and for future generations. Right now there’s no better place to save your money.

For more information contact Simon Glazier (simon.glazier@aab.co.uk)