Retaining pension wealth within the pension fund and passing it down to future generations is an extremely tax efficient estate planning solution.
It combines Inheritance Tax (IHT) free inheritance with tax free investment returns and, potentially for some beneficiaries, tax free withdrawals.
Now pension freedoms have come into force, the new rules will allow holders of personal pensions to nominate an individual to inherit the remaining pension fund as a “nominee’s flexi-access drawdown account”.
This can be anyone at any age and is no longer restricted to your “dependents”.
Adult children who have long since flown the nest can now benefit and don’t have to wait until 55 to access it.
If the original member dies after age 75, any withdrawals will be taxed at the beneficiary’s marginal rate.
But if death occurs before age 75, the nominated beneficiary has a pot of money they can access at any time completely tax free.
In either case, the funds are outside the beneficiary’s estate for IHT while they remain within the drawdown account and will continue to enjoy tax free growth.
This could see a u-turn in strategy for those whose primary concern is maximising what can be passed on.
The previous wisdom of stripping out funds and gifting the surplus income to minimise the impact of the 55% tax charge has given way to retaining funds within the pension as a more tax efficient solution.
And it goes on and on…..
The ability to pass on and on pension wealth doesn’t stop there.
The nominated beneficiary can nominate their own successor who will take over the drawdown fund following their death – unlike the previous rules where lump sum death benefits are the only option for non-dependants.
This will allow accumulated pension wealth to cascade down the generations, whilst continuing to enjoy the tax freedoms that the pension wrapper will provide.
All of this, however, relies on your plans being compatible with certain aspects of the new legislation.
If your planning has not been done the right way this could leave your beneficiaries with hefty unwanted tax bills.
It is important to remember, the value of good financial planning can be far greater than you may think.
with Charlie Kearns
Independent Financial Adviser
