Pension legacy planning and beneficiary nomination

Gary Naylor

Pension legacy planning and beneficiary nomination

Pensions have traditionally been seen solely as a means of saving for retirement, however, pension freedoms introduced in 2015 transformed the role that a modern flexible pension can play in effective legacy/estate planning:

• Less tax – The previous, 55% death tax, has been removed. Flexible death benefits are now tax-free on death before 75 – or taxed as the beneficiary/ies’ income on death aged 75 or over, albeit only when/if income is taken, so this can often be controlled/managed in the most tax efficient way possible over a period of time.

• More choice – Any nominated beneficiary can now inherit pension wealth and keep it inside the pension wrapper as a drawdown pot that can be accessed whenever funds are needed – this option is no longer restricted to dependants. However, it is imperative that to make the most of this flexibility it relies on getting the right nomination in place.

• IHT protection – Most modern pensions offer robust protection against IHT. Note that many older pensions (such as Retirement Annuity Contracts and Section 32 Pensions) may be inside the estate for IHT purposes. There is therefore scope with these pensions to transfer to a modern flexible pension, producing an immediate benefit for IHT purposes, however, transfers of this nature made by those in serious ill health are likely to still fall foul of IHT, so it is better to consider the option as early as possible before health potentially deteriorates.

• Inherited drawdown flexibility – The scrapping of the old income limits, combined with the much wider choice of beneficiaries, means inherited drawdown creates a flexible, easy-access legacy that can be cascaded down the generations outside the IHT net. Furthermore, it never counts against a beneficiary’s lifetime allowance (LTA), which is a limit on pension benefits one can accumulate during their lifetime without tax implications.

• Bypass trust control – Pension freedom has reduced the need for, and appeal of, pension bypass trusts. However, they can still have an important role to play in certain circumstances for those who need more control over who inherits what and when, and are prepared to potentially pay a bit more in tax to achieve this.

Taken together, these make modern pension contracts one of the most flexible, tax-efficient legacy planning vehicles available. But it all hinges on having the funds in the right pension, with the right nomination at the right time.

To find out more, please contact Optimum Independent Financial Advisers. We offer a free no obligation initial consultation.