Don't get stung

Do you have a longstanding personal pension or a workplace pension that was taken out some time ago? These schemes are usually quite simple and it can be tempting to leave them alone. However, the death benefits are often inferior. This article explains what you can do to improve that situation.

Here’s something you won’t hear me say very often – George Osborne, former Chancellor of the Exchequer, enacted some lovely legislation. The new Pension Freedoms were put in place in 2015. It may be some years ago now, but many people are still not taking advantage of all the aspects.

Some little-known facts

  • If you die below the age of 75, your pension beneficiaries can take a lump sum or an income stream completely free of income tax and inheritance tax (IHT)
  • If you die over the age of 75, the death benefit is free of IHT but any drawdown taken as income is taxable at the beneficiary’s marginal rate of income tax
  • If your pension beneficiaries die and there are unused funds from your pension, they can pass them on to their own nominated beneficiary
  • Your pension fund will continue to sit outside the beneficiary’s estate for inheritance tax purposes which will save future inheritance tax for the following generation

However, not all pension schemes offer all these most up-to-date options. The main offenders are workplace pensions and personal pensions taken out some time ago. These schemes will only pay out a lump sum on death which will bring the fund into the beneficiary’s estate and lose the advantages of a modern pension scheme such as tax-free growth.

What this means to you

  • Take time to look at your estate planning and review your pension/s in case they need to be transferred to a more recent scheme that grants this tax-free benefit
  • Check and update your list of nominated beneficiaries. Note that you can  bequeath your pension funds to anyone, they don’t have to be your dependents
  • Remember that diversification doesn’t mean having small pots of money in lots of places when it might make more sense to consolidate a large amount of money in one diversified plan

The sting in the tail is that these changes can’t be made on your deathbed. The advantageous tax benefits could be lost if you die within two years of making the change.

This article is designed to kick you up the bottom (metaphorically) so that you review your pension/s before it’s too late.

For more information, please give me a call on 01435 863787.

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Name: Lance Baron

Certified Financial Planner (CFP) based in East Sussex, UK. We support people in Southeast England with more than £500K to invest by building a financial plan that will help them live the life they want… until age 100