Some 75% of UK adults have private pensions. However, not everyone understands what happens to these products when they pass away. To help you navigate this financial planning challenge, we’ve put together this guide below. If, after reading, you have any further questions please contact us.
How do pensions and inheritance tax interact?
Under current UK rules in England, money in private pensions is exempt from inheritance tax (IHT). It is therefore seen as a tax-efficient way to pass on wealth and an effective tool in UK estate planning. Unused pension pots sit outside your estate, allowing wealth to be passed on efficiently to the next generation.
Do pensions count towards inheritance tax?
Under current UK rules, unspent private pensions don’t usually count towards the value of your estate when inheritance tax is calculated. This means they can be passed onto a beneficiary in the event of your death. There are two types of workplace pension but they are treated differently:
- Defined contribution (DC): If you pass away after the age of 75, beneficiaries will have to pay income tax on your on DC pension withdrawals. If you die before 75, beneficiaries can usually access the funds tax-free.
- Defined Benefit (DB): DB pensions, sometimes known as final salary pensions, provide a continued, guaranteed income rather than a money pot from which to draw. After your death, some schemes may pay a percentage of this income to your spouse, partner, or dependants. The exact rules are determined by the scheme, so check with your provider.
Inheritance tax and pension pots
One important thing to note here is whether beneficiaries have been nominated. If they have, they will typically receive your DC pension. If no beneficiary has been named, the DC pension provider may decide where it goes on your behalf and it will typically be endowed to your estate. Under these circumstances, the funds would be eligible for inheritance tax depending on the total value of your estate.
If you have a DB pension in place but your spouse or civil partner is not listed with it, it will typically stop when you pass away unless that particular scheme allows for continued payments to your children or other dependants.
Regardless of the type of private pension you have, it’s essential to nominate your beneficiaries and keep that information updated.
Pensions and planning
When it comes to long-term financial planning, you need to make the right decisions for your situation and revisit them over time. Marriage, divorce, new loved ones, or changes to your health are all reasons to evaluate your pension beneficiary nominations and keep them updated. You also need to think about integrating your pension into your wider financial planning. These can be complex matters, which is why it’s wise to call on a Narrative Wealth adviser. If you are looking for IHT planning help in Wimbledon, we are on your doorstep and ready to help.
Contact us
For more information about pensions and inheritance tax matters, arrange a financial planning consultation with Wimbledon Village-based Narrative Wealth to review your pension and estate planning.