0161 973 9150

Passing on Pensions – 3 Key Questions to Ask

Gresham Wealth

The introduction of pension freedoms in 2015 changed the landscape regarding passing on wealth – with pensions becoming a much more attractive option via which to do so.

The good news is that pensions are generally considered to be a highly tax efficient way of saving, drawing an income out and passing on wealth to the next generation. Provided a pension is held in a defined contribution contract and the correct paperwork is in place, it is likely to have a good deal of flexibility, both for the holder and for potential inheritors.

However, as with all things pension-related, there are potential complicating factors and some key questions to ask when looking at the wider picture of how to cascade wealth, which we look at in this article.

Do you need your pension for income, or do you intend to pass it on to future generations?

Before you begin to look at the potential ways of using a pension to pass on wealth, you will need to consider whether you require your pension for income in retirement, whether you will look to other sources to provide this, or a combination of both.

Whilst pensions have a variety of benefits, any income after the initial tax-free sum has been taken is taxable. It can therefore be more tax efficient to draw an income in retirement from other sources first, such as ISAs. Cashing in investments held outside of ISAs and utilising the annual Capital Gains Tax allowance is another potential option.

To establish whether you will need to draw down from your pension and by how much, your financial adviser can help you to undertake a cashflow analysis. This process considers all your assets and how much you may need in retirement to work out if you are likely to have enough during your lifetime and how much is left over, if any. From here, you can start looking at the best ways to pass assets on to future generations.

Is the correct paperwork in place?

Whilst modern pensions are generally considered to be tax efficient and flexible, these assumptions all hinge on having the funds in the right type of pension, with the right nomination in place.

The rules generally allow the pension holder to complete an ‘Expression of Wish’ form which instructs the provider to pass on the contents of the pension to any person or people of the pension holders’ choosing.

If the death of the pension holder occurs before they are age 75, the entire remainder of the pension pot will pass on to the beneficiaries, tax-free. Where death occurs after age 75, pension funds that are taken by beneficiaries are subject to their own marginal rate of income tax.

If the inheritor of the pension decides they will not need to access the funds in their own lifetime, they can choose to pass the pension on to another beneficiary, provided they haven’t drawn on it at all.  

Are there any question marks over the potential inheritors of the pension?

Whilst passing on pensions is one of the most tax efficient methods of cascading wealth down the generations, the beneficiaries will potentially gain full control over a significant sum of money all in one go, which can be a concern to pension holders. Furthermore, who ultimately receives any remainder of the pension fund upon the death of the initial beneficiary (or beneficiaries) is out of the original pension holder’s hands.

In such circumstances, a bypass trust may be considered as an option for passing on pension wealth. Although less tax efficient, more complex, and possibly more expensive, a trust offers greater levels of control rather than simply leaving the full sum of a pension to someone else.

Placing control with trustees can ensure the funds find their way to the right people at the right time, as the trustees are chosen by you and are provided with instructions on how to manage and distribute the funds in line with your wishes.

Using a trust can, for example, ensure that children from an earlier marriage benefit after the death of a spouse.

Where there is potential concern over financially unstable beneficiaries, ages and limits can be set as to when pension funds are passed on.

A trust may also be pertinent to consider where a significant ‘death in service’ benefit is due to the pension holder. Such payments are made into an estate, and could therefore be subject to potential inheritance tax, if applicable. If such a payment would mean exceeding the Inheritance Tax allowance, a trust can be a useful way to avoid the 40% tax charge.

How best to pass on wealth is a potentially complex decision to navigate, with many factors to consider. Our team can work with you to analyse the options available, helping to reach a plan that best satisfies all your needs and wishes.

Please contact us to discuss any of the information in this article.

I am only in this position because of you. One of the best decisions I have ever taken going with GWM.

With great thanks for all your reassuring attention over the last year. It means more to me than I can express in a few words.

I just want to thank you and your team so very much for all you do for me throughout the year. It is a real comfort to know that my investments are in such capable hands. I literally couldn’t do it on my own.

We are both very grateful for the time you spent with us in explaining various options. We certainly feel we now both have a much better understanding of our situation & the decisions which we need to consider moving forward.

Thanks again for your advice, you have given me the kick I needed to take control and I’m very grateful for that.

We feel we can phone at any time during office hours if we need anything clarifying. Our financial adviser knows our personal circumstances and is in tune with our goals and lifestyle. His advice has been and continues to be excellent.

You’ve solved that dilemma for me… Thank you for being so clear and honest as always.

A very personalised service… All advice is tailored to my needs with great consideration to issues I may not have thought of myself. I feel confident about my future finances.

Thank you so much again for your time and brilliant advice.

Just a big thank you for all you have done for our family. We do appreciate it.