Passing your Pension on

Passing your Pension on.

The new pension freedom that came into force in April 2015 brought with it welcome changes, allowing pensions to be passed to beneficiaries in a tax-efficient way.

If you die before age 75 – and before taking anything from your defined contribution pension – this will usually be paid to your beneficiaries as a tax-free lump sum.

YOUR PENSION CASH
On your death, any unspent cash or other assets derived from  your pension income will be considered as part of your estate, for Inheritance Tax purposes. Provided that you have a valid Will in place, you will be able to leave them to whoever you wish. However, if you haven’t made a Will, then your estate will be distributed under the intestacy rules.

ANNUITIES
On your death, annuity payments will stop unless you took out a joint life annuity or an annuity with a guarantee for a fixed number of years. If your annuity is a ‘valueprotected’ policy, any remaining fund can now be paid as a tax-free lump sum.

DEATH TAX RULES ON PENSION POTS
Under the new rules, if you die before the age of 75, your pension can be paid to the beneficiary of your choice as a tax-free lump sum. (As long as it is less than the lifetime allowance, £1.25 million in tax year 2015-16). There will normally be no Inheritance Tax to pay.

IF YOUR MONEY IS IN PENSION DRAWDOWN
If you die before age 75 with your money in drawdown, your spouse, partner, dependant or beneficiary can stay in drawdown and take the income tax-free,take a lump sum tax-free, or buy an annuity where income will be paid free of tax.If you die after age 75 then they can take an income, subject to tax at their marginal rate, take the pension as a lump sum which will be taxed at 45% (expected to be at the beneficiary’s marginal rate from 2016/2017) or buy an annuity where the income will be subject to tax at their marginal rate.

 

SIMPLY MONEY NEWSLETTER – SUMMER 2015