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Hold on to those pensions

A good inheritance plan will let you pass down an asset to whoever you choose free of tax on your demise, but being able to use it yourself if required beforehand. A defined contribution (DC) pension plan lets you do just that.

Some of the main aspects of the new pension rules that came into place in April 2015 were the removal of the limitations on taking benefits prior to the age of 75, and also the big changes to tax implications on death. An owner of a pension now does not have to take their pension benefits (crystallise) before the age of 75.They can leave the plan in an undrawn state, or take some drawdown. There are also no longer any requirements to access a plan before the age of 75 for taking any tax-free cash lump sum benefits. The only test that an uncrystallised pension plan will be checked against upon reaching the age of 75 is the Lifetime Allowance limit test (currently £1,000,000).

So, if you were to die before the age of 75 with either an uncrystallised or crystallised pension the value of the plan could be passed down tax-free to your chosen beneficiary. Crude as this may seem, your beneficiary will have won a ‘death jackpot’ with no income tax liability. They then appoint new beneficiaries/nominees to receive the plan in the event of their death, and so it continues … unless there is a rule change???There is a slight difference with the tax treatment if you were to die after age 75 in so much as the money paid to the beneficiary will be subject to income tax at their marginal tax rate.

If you have enough assets (not including the pension) and income within your estate, the best idea would be to leave the pension alone for it to cascade down to family, and only accessing it if no other means of income/capital are readily available. The only caveat to this may be where there becomes a need for Long Term Care provision which can be very costly and would chew up a lot of free capital anyway. One view might be to access the tax-free cash part of the plan in your early 70’s whereby gifts could be made, trusts set up, or investing in assets that qualify for Business Property Relief, but mindful of the investment within the BPR which can carry a large risk. The thinking behind this is that whilst not drawing the tax free cash part enhances the IHT saving, the recipient on death (assuming post 75) will end up paying income tax on it anyway.

Either way, the long and short of it is keep those pensions!