Passing on pension benefits

Providing for your loved ones after your death.

If you’ve spent a lifetime saving for retirement, you’d probably like any remaining money to go to a loved one after your death. But whether pension benefits are payable to a beneficiary, and how they’ll receive them, is dependent on the type of pension you’ve chosen and how you’ve accessed it in your retirement.

Thanks to changes in the way that pensions are taxed, more of your fund can survive your death and provide an income or nest egg for your loved ones to enjoy, long after you are gone. Since April 2015 it has been easier to safeguard your pension for your heirs, but it’s important to make sure you’re keeping up with the changes.

The way that you decide to take your pension will affect what you can do with it when you pass away. And while it’s not always easy to talk about, the way you eventually pass on your pension has the biggest impact on other people, so it could help if you talk to your spouse, partner, children or other people close to you when you’re deciding how you take your pension savings.

Pension death benefits

If you have not yet accessed your pension, or you have made withdrawals from your pension but left some money invested, it can usually be passed to a beneficiary after your death. The specifics, for example, in what form they will receive these death benefits and whether they will pay tax, will depend on your individual circumstances (such as your age) and the scheme rules.

You should always obtain professional financial advice to assess your specific situation. But if your pension scheme allows you to choose a beneficiary, ensure you have named the person you intend to leave your money to.

Annuity death benefits

If you have used your pension savings already to purchase an annuity, this can only be passed on to a beneficiary in certain cases, which must be established when the annuity is purchased. A typical lifetime annuity only provides a guaranteed income for the lifetime of the annuity holder, regardless of how long this is.

For your annuity income to go to a loved one after your death you must choose either an annuity with a guarantee period (which provides an income for a set period, whether you are still living or not) or a joint life annuity (which provides an income for life for whichever partner lives longest).

State Pension inheritance

In certain circumstances, your partner can continue to receive your State Pension after your death. For example, if you’re a man born before 1951 or a woman born before 1953, and you’re receiving the Additional State Pension, this can be inherited by your partner (husband, wife or registered civil partner) after your death if they have reached the State Pension age.

Combined finances

Planning ahead for your financial future together.

Some couples may prefer to keep their finances separate, while others share everything. Whichever method you’ve chosen, when it comes to retirement saving, it’s worth planning together to ensure you’ve made the most of all the allowances and benefits offered to couples.

Your golden years may ultimately be the best of your relationship if you understand each other’s future goals, needs and expectations.

Set your budget

The first step of planning for retirement is to look at how much money you’ll need to cover your outgoings. Start by analysing your current spending, and then identify where your spending might increase and decrease over the years.

If you have different perspectives on how extravagant your lifestyle will be, it’s best to discuss this openly and early on as you’ll need to come to an agreement. One of you might be underestimating how much you’ll need or overestimating what you can realistically afford.

Remember to plan for different circumstances. Hopefully, you’ll enjoy a decades-long retirement together, but your finances might look very different if one of you were to fall ill or die. It might be unpleasant to discuss but is essential to plan for.

Assess your finances

Next, look at the income you’ll both have from the State Pension and any private pensions. Set aside some time to trace pensions from previous workplaces that you might have forgotten about or not known an employer was paying into, as many people find extra cash that way.

Make sure you understand all of your options for withdrawing your pensions, as the amount you get back from your pension depends, in part, on which option you choose. Consider, for example, whether you want to take a tax-free lump sum of up to 25% of your pension savings at the start of your retirement, and how best you could use that.

If you have any debts or savings you haven’t mentioned to your partner, it would be wise to open up about these now.

Top up your savings

If your existing pension savings won’t provide the income you think you’ll need, look at ways to address the shortfall. Could you make some lifestyle changes now to save more for later?

If one or both of you have less than 35 years on your National Insurance record, you can make voluntary contributions to receive more State Pension.

It’s worth obtaining professional financial advice about using both of your pension allowances, and whose pension it is more sensible to contribute to. You both have an ‘annual allowance’, which is £40,000 in the 2020/21 tax year, or 100% of your income if you earn less than £40,000.

This means with the current annual allowance limit, someone paying Income Tax at the standard rate of 20% would receive a maximum sum of £8,000 of pension tax relief towards their pension pot. If you pay tax at the higher rate of 40% you would receive up to £16,000 of tax relief, while those in the additional rate band of 45% would currently receive £18,000 of tax relief.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL 55 (57 FROM APRIL 2028). THE VALUE OF YOUR INVESTMENT (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. YOUR PENSION INCOME COULD ALSO BE AFFECTED THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAX ADVICE.

Reduce your Inheritance Tax bill

10 ways to protect your estate for your loved ones.

Even those who believe they have moderate wealth levels may still need to take action to minimise Inheritance Tax, particularly if they own property and have savings and investments.

Inheritance Tax is payable in the UK on death, and sometimes when you give away certain assets during your lifetime. It can be a great concern for individuals with wealth exceeding the current £325,000 nil-rate band (2020/21 tax year).

Naturally, you’ll want to pass on as much as possible to your loved ones, rather than paying 40% to HM Revenue & Customs (HMRC). Are you worried your family could be left with an Inheritance Tax bill after you’re gone?

Here are 10 tips to pay less or avoid Inheritance Tax:

1. Potentially exempt transfers

One of the better-known ways to pass on wealth free from Inheritance Tax is to gift it more than seven years before your death. Of course, there is a degree of unpredictability in the outcome. If you were to die within seven years of making the gift, Inheritance Tax may be charged, though the rate will be reduced if more than three years have passed.

2. Personal gifts

Gifts up to a certain value can be made free from Inheritance Tax, even in the last years of your life. Your allowance includes: large gifts totalling no more than £3,000; unlimited small gifts of up to £250; and wedding gifts of up to £5,000 for your children, £2,500 for your grandchildren, or £1,000 for others

Gifts made within your regular pattern of income and normal expenditure (for example, quarterly payments towards a grandchild’s school fees from your annual income) can usually be made free from Inheritance Tax, although you may need to document this pattern for three or more years.

3. Charitable gifts

Gifts to registered charities can be made entirely free from Inheritance Tax, which can help you to reduce the size of your estate to within the Inheritance Tax threshold.

Additionally, if at least 10% of your total estate is gifted to charity, it will reduce the rate of Inheritance Tax payable on your remaining estate (above the nil-rate band) from 40% to 36%.

4. Insurance

It is possible to take out a life insurance policy written in an appropriate trust that can provide a lump sum on your death to be used to pay the resulting Inheritance Tax bill. If this policy is within a trust, the lump sum paid out will not count towards your estate.

Insurance can also be taken out when making large financial gifts to cover the Inheritance Tax bill if you were to die within the following seven years (for example, before they are excluded from your estate). This is called a ‘term assurance’ policy.

5. Pensions

Typically, though with some exceptions, pensions are excluded from the calculation of your estate and can be passed on free from Inheritance Tax. It is important to name a beneficiary to whom you wish to pass on your pension benefits.

It is also possible to make payments in your lifetime into another person’s pension, which will protect this money from Inheritance Tax. For example, you can set up a Junior Self-Invested Personal Pension for a grandchild under the age of 18 and pay in up to £2,880 a year. But they will not usually have access to this money until they reach age 55.

6. Discretionary trusts

A discretionary trust can help you to reduce your Inheritance Tax liability by holding money in the name of your beneficiaries while you retain control. You can use your nil-rate band to pay in up to £325,000, which will be excluded from your estate after seven years. Funds above the nil-rate band may attract a lifetime tax charge.

7. Loan trusts

If you would like to protect your money in a trust but need to know you can withdraw it if you need it, it’s possible to loan money to a trust. You will always have the option to withdraw the original capital you loaned, but any growth on that capital will be protected within the trust from Inheritance Tax.

8. Discounted gift trusts

If you would like to earmark some wealth to be passed to a beneficiary or beneficiaries on your death, but you want any income generated to be paid to you in your lifetime, you can do this through a discounted gift trust. This will exclude the contents of the trust from your estate for Inheritance Tax purposes but still provide you with regular payments from it.

9. Business Relief

Business assets can usually be passed on either in your lifetime or after your death with Inheritance Tax relief of up to 100%. A business, interest in business or shares in an unlisted company will usually qualify for 100% Business Relief. Land, buildings and machinery related to the business will usually qualify for 50% Business Relief, as will shares controlling more than 50% of the voting rights of a listed company.

10. Agricultural Relief

If you own agricultural property (land or pasture used to grow crops or rear animals as part of a working farm), this can usually be passed on in your lifetime or after your death free from Inheritance Tax.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION AND TRUST ADVICE AND WILL WRITING. TRUSTS ARE A HIGHLY COMPLEX AREA OF FINANCIAL PLANNING.

INFORMATION PROVIDED AND ANY OPINIONS EXPRESSED ARE FOR GENERAL GUIDANCE ONLY AND NOT PERSONAL TO YOUR CIRCUMSTANCES, NOR ARE INTENDED TO PROVIDE SPECIFIC ADVICE.

TAX LAWS ARE SUBJECT TO CHANGE AND TAXATION WILL VARY DEPENDING ON INDIVIDUAL CIRCUMSTANCES.

Responsible investing

Invest today. Change tomorrow.

Responsible, sustainable and environmentally friendly investing is here to stay. But, while demand is growing among all age groups, genders and income bands, some savers and investors are missing their biggest opportunity for responsible investing, which is through their pension.

We all want to make responsible choices as more of us are becoming aware of global challenges, such as environmental issues, human rights and climate change. We’re also starting to care more about how our behaviours affect the planet and society.

Future success

Taking ESG (Environmental, Social and Governance) factors into consideration when investing is becoming more mainstream. It is acknowledged that companies that act responsibly to their employees, the environment and the public have a better chance of future success than those that don’t. Investing in these companies is a logical approach financially as well as ethically.

Many pension holders understand this approach and see the value of it. In a recent survey, more than one-third of respondents said that the option to invest their pension only in sustainable companies is important to them[1]. Nearly two-thirds said having clearly branded funds for investing in environmentally and socially responsible companies is important.

Pension investments

The same survey suggests that pension holders feel that sustainable investing isn’t just important, but interesting. More than half of respondents said that a fund focused on clean energy and lowering carbon would make them more interested in their pension. A similar number felt that way about a zero-plastic fund.

But while pension holders feel these issues are important and interesting, that isn’t yet affecting the way they invest. Most people don’t manage their pension investments themselves, instead leaving their pension invested in the default options set by a provider chosen by their workplace. So, more than two-thirds of pension holders do not know how sustainable their pension is.

Environmentally friendly

Many pension holders don’t know that they can choose their own funds, and therefore that they can choose sustainable or responsible funds. Around half are unaware of ways to ensure their pension is environmentally friendly.

Clearly, there is a large audience of individuals who would like to invest their pension more sustainably and responsibly but don’t know where to start. There are plenty of options, but without specialist experience, it can be difficult to select those that are truly responsible and environmentally friendly and will also deliver the financial return you’re seeking.

Source data:
[1] https://adviser.scottishwidows.co.uk/assets/literature/docs/2020-09-responsible-investment.pdf

THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION WHICH ARE SUBJECT TO CHANGE IN THE FUTURE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

call: 01422 349 131

email: info@iftwm.com

Month: April 2021