Intergenerational planning – making the most of the new pension rules - Blog No.3

What do I need to think about if I am under 75?

If you want to pass wealth on to your children, grandchildren or any other beneficiary for that matter, and you are under 75, here are some of the things you should be thinking about.

If I die before I am 75, will my remaining pension funds be taxed?

No. Where a pension member dies before the age of 75, the remaining fund can be passed tax-free to anyone. As a result, up to age 75, if you have a DC pension (formerly called a ‘money-purchase’ pension, which includes arrangements such as personal pensions, ‘stakeholder’ pensions and ‘SIPPs’), you can afford to be relatively relaxed about passing on your estate tax-efficiently. However, there are still issues to consider, and these vary depending on where you want your funds to go on death.

I want to pass some funds to charity

Using your pension funds to make a charitable donation on death will mean that the funds pass tax-free to the charity. However, if the balance of your estate (the non-pension part) is likely to suffer inheritance tax (IHT), this is perhaps not the best way to organise matters. Instead, you might arrange for your charitable donations to be made through your Will, reducing the size of your taxable estate and the IHT payable at 40%. Pension funds, meanwhile, can be paid (tax-free) to family members.

Making a charitable gift via your Will could even reduce the rate of IHT on your remaining taxable estate from 40% to 36%.

I want to pass some funds to specific individuals I

f you know with certainty whom you want your pension funds to pass to, then those funds could be paid as a lump sum, tax-free to that individual. Alternatively, you could pay the funds to a pension in the recipient’s name.

“Remember, under the new pension rules, pension funds can be withdrawn from an inherited pension at any time, without any tax, at any age, so there are no access or tax disincentives to doing this.”

This option might seem unappealing at first, but remember, under the new pension rules, pension funds can be withdrawn from an inherited pension at any time, without any tax, at any age, so there are no access or tax disincentives to doing this. And once the funds are in the pension, they secure income, capital gains and inheritance tax advantages.

Even if funds are required to be spent immediately, there seems little downside in directing them via a pension structure as a tax-efficient ‘holding bay’.

So do I have the final say?

No. A critical point to remember in all this is that pension trustees (essentially the pension provider) have discretion as to whom the benefits are paid to on your death. However, you can (and should) make the trustees aware of what you would like to happen using a ‘death benefit nomination form’ or ‘letter of wishes’. While not binding on the trustees, in the vast majority of cases the trustees will pay out according to the nomination/letter of wishes, so it is crucial that this is regularly reviewed and kept up-to-date, particularly as you turn 75. A nomination/letter of wishes can be replaced at any time, the new one simply superseding the old one.

What if I don’t know whom I want my funds to go to?

Ah – you would not be alone. This is a more common scenario than you might think. We’ll look at this situation in a later blog (where we meet the discretionary trust), but first, next week, what to think about if you are over 75.

Richard is a Chartered financial planner, Certified financial planner, Fellow of the Personal Finance Society, Fellow of the Institute of Financial Planning, and Affiliate of the Society of Trust and Estate Planning. He works with clients in Scotland and in London and has particular expertise in helping individuals and families pass wealth down the generations. View Richard’s profile here.

If you would like to discuss your financial planning options, please contact us with any questions you might have. You can do this by calling our head office on 0131 220 0000, or by emailing us at enquiries@carbonfinancial.co.uk. or you can also follow us on Facebook, Twitter or LinkedIn.