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Pensions as Inheritance Tax Planning Vehicles

Pension Advice 

Amidst the flurry of recent pension changes and announcements, and indeed the start of electoral campaigning, one of the most striking announcements has been that relating to the idea that large pension funds can now be passed down through the family line whilst legitimately avoiding inheritance tax.

The changes will take effect from 5th April 2015, when firstly any pension plan holder with for example an ordinary defined contribution personal pension plan who dies before the age of 75 can have their benefits paid out tax free to any beneficiary. This could be paid either as an income or indeed a tax free lump sum. For many people this will prove a huge help, with the monies neither being subject to income tax or inheritance tax.

What makes this particularly attractive is that the pension fund could remain intact, and does not even impact on the beneficiaries own pension entitlements. Some people may opt for a tax free income stream to increase their overall income, whilst others may be able to modify their own income to minimise income tax liabilities. This inherited pension could also be passed further down the family line, if there was still value left in the pension account.

Indeed there would be an argument not for taking lump sums as this would bring the monies into the beneficaries estate for their own inheritance tax consideration, unless of course the monies were drawn to pay down debt or clear liabilities.

In the event that death of the pension plan holder occurred after age 75, then the situation is modified very slightly, in that the proposals for the tax years 2016/17 are that then any income or lump sums drawn would be taxable in the hands of the beneficaries at their own marginal rate of tax. This might then require a little planning to optimise the way in which benefits were drawn in this case.

Nevertheless the monies would still be outside the original Pension owner’s estate for inheritance tax purposes. It should also be noted that for the tax year 2015/16 anyone drawing a lump sum under this situation would face a 45% tax charge, so timing is very critical in these instances.

The key to the tax treatment of pension benefits in these cases is very much a question of the age of the pension plan holder at their death, and this is the case for the first plan holder and indeed subsequent plan holders as the pension value is passed down through the generations.

As you will see from the above the new pension freedoms offer tremendous opportunities. However, it is extremely important to take independent advice on these matters before taking any action, as pension legislation is always subject to change and review, whilst everyone’s circumstances are different.

If you would like to learn more about any of the points raised in this article, please contact Shaun Bell or Stuart Read at Sabre Financial on 01548-856444 or via email at or .

Sabre Financial is a trading title of Sabre Financial Planning Ltd. Sabre Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority. 




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