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Pension Changes, Wills and IHT – what should I do now?

16 Mar 2015

The new pension rules come into force from 6 April. Anyone with a potential Inheritance Tax (IHT) liability should consider whether these changes provide an opportunity to plan – or a need to change.

Here are some common questions from our clients;

Has the IHT rate changed?

No. The threshold remains at £325,000. Any assets in excess of this amount are taxed at 40% unless left to a spouse or charity. There are also reliefs from IHT for business / agricultural assets. If your spouse has died, you may have the benefit of their unused Nil Rate Band.

Is my pension subject to IHT?

Most pensions are not subject to IHT. They may, however, be subject to tax in the hands of the recipient after your death. Plus, if money is paid out to a beneficiary, it could be chargeable to IHT in their hands when they die if their own estate exceeds the IHT threshold.

What happens to my pension when I die?

The new rules allow you to leave your pension in a tax efficient manner.

If you die under the age of 75, you can nominate who you would like to receive your pension death benefit. This would be paid out to them tax free.

Alternatively, these nominated people can choose to withdraw from the fund as and when they wish making use of their income tax allowance each year. In turn the nominated people can nominate their own successor (and so on) so that the money can keep passing down the generations in a tax efficient way.

If you die after age 75, you can nominate who you would like to receive the pension death benefit. However, the payment of the funds will be subject to a 45% tax charge.

Again, the nominated people can choose to leave the pension fund intact and withdraw from the fund as and when they wish with the withdrawals being taxed at the recipient’s marginal rate.

If I am nominated to receive a pension death benefit, should I withdraw it?

If your estate is such that IHT may already be payable on your death – leave the fund intact and draw from it as necessary. Alternatively, you can nominate your own successors so that they get the benefit of the fund when you die.

I have already nominated my pension death benefit into a trust, should I change this?

Again the answer depends upon what you are trying to achieve and when you die.

If you die under the age of 75, it may be better to have the money paid to your chosen trustees. This will be tax free and can be held by the trustees on behalf of the beneficiaries you choose. The trustees can have flexibility to determine who should benefit and when. This could be particularly important if you have vulnerable or disabled family members.

If you die after age 75, a payment to the trustees will be subject to a 45% tax charge. It might be better to nominate people who can leave the fund intact and draw from it within their own income tax allowances each year.

What should I do now?

The changes to the rules highlight the need to review your affairs and make sure nominations are updated. You should also consider your own Will and estate planning. Think about who you leave your estate to and their tax position. If your  children already have estates in excess of the IHT threshold, or are higher rate tax payers, you should consider whether your pension is better nominated in favour of your grandchildren who can leave the fund intact and withdraw as and when required in a tax efficient way.

At Hay & Kilner, our team of Private Capital lawyers can assist you in reviewing your IHT position, your Wills and Trusts, and work with your pension advisers to ensure that your affairs are up to date and structured in the most tax efficient manner for you and the next generation.

For further information, please contact Alison Hall, Partner at Hay & Kilner

Call: 0191 232 8345

Email: Alison.Hall@hay-kilner.co.uk