As the pensions death tax has been abolished pensions are now more attractive as an inheritance planning tool. As well as providing tax benefits on contributions and a flexible income in retirement, pensions can now be used to pass on assets to future generations as part of an overall investment strategy.
Although pensions were exempt from inheritance tax (IHT) in the majority of cases, they were normally subject to a punitive tax charge – known as the pension death tax – at the rate of 55 per cent if the deceased had started to take income or had taken tax-free cash.
Now when someone older than 75 dies, their heirs will pay income tax on any remaining pension at only their marginal rate and no tax charge will apply if they were aged under 75 (subject to them having available lifetime allowance remaining).
Previously, senior doctors may have stripped funds out of their personal pension or SIPP in retirement but this new move will make it much more appealing to keep pension funds invested and to pass these on to family members in the future. Instead, you could choose to run down other assets such as ISAs first.
Crucially your heirs can control the level of tax they pay by planning their withdrawals carefully.
And the possibility of passing down accumulated pension wealth does not end after one generation. Your nominated beneficiary can choose their own successor provided their existing pension arrangement allows for drawdown accounts.
Remember there can be financial disadvantages for taking pensions in the wrong order and penalties for contributing above set limits. To discuss the best outcome for you and your family, please call one of our advisers on 020 7636 7006.