Andrew Tricker, 25 July 2024
Planning for the future is crucial, but it's equally important to understand what happens to your investments after you’re gone. In our ‘Investments Beyond Life’ series, we’ll be covering what happens to your assets when you pass away.
In the first blog of this series, we’ll delve into what happens to your pensions after you pass away, ensuring you are well-informed about tax implications, inheritance laws, and financial planning options.
The tax treatment of defined contribution (money purchase) pensions on death is subject to several factors, including the age of the pension member and the type of payment.
Most pension schemes are written in a Discretionary Trust and therefore they are outside of the member’s estate for IHT purposes. If the pension benefits are distributed within 2 years of member’s death, there is typically no IHT payable.
There are, however, some important things to consider: some older pension contracts offer a ‘return of fund’ only which means that in the event of death, the scheme Trustees will pay out the pension value to the member’s nominated beneficiary(ies) as a lump sum payment which could result in a future IHT liability. If, for example, the recipient is a surviving spouse who does not spend or gift the funds in full, in the event of the spouses’ death, the pay-out from the pension would be in their estate and that capital would be subject to IHT.
More modern contracts allow pension death benefits to remain within the tax-privileged pension environment, which provides the recipients with complete flexibility over how and when they access the inherited pension. They can also nominate their own beneficiaries to receive any remaining funds on their death.
Keeping an up-to-date Expression of Wish or nomination form is crucial and allows members to indicate who they would like to nominate as the beneficiary(ies) to receive their death benefits.
Beneficiaries must be designated within two years of the earlier of; the day the scheme administrator first knew of the member’s death, or the day they could first reasonably have been expected to know of it for the favourable tax treatment; otherwise, lump sum payments are taxed at the recipient's marginal rate.
If an individual dies before age 75 with a joint life or guaranteed term annuity, beneficiaries can receive payments tax-free. However, if the individual dies at age 75 or older, beneficiaries will pay tax at their marginal rate on the income.
Understanding the complexities of pension inheritance can be daunting. For a confidential and private chat, please reach out to Director, Andrew Tricker (andrewtricker@lfwm.co.uk) or Chartered Financial Planner, Görkem Barron (gorkembarron@lfwm.co.uk).
Please note that the value of investments can fall as well as rise and is not guaranteed. The Financial Conduct Authority does not regulate Tax Planning or Estate Planning.
*This blog post has been written by Lubbock Fine Wealth Management (LFWM). The opinions and views expressed are those of LFWM and do not necessarily
reflect those of Lubbock Fine. All information provided in this blog is for informational purposes only and should not be considered professional advice.
LFWM is not responsible for any actions taken based on the content of this blog.