Inheritance tax planning using pensions
Since the introduction of “pension freedoms” last year and the removal of pension funds from the inheritance tax net, pensions can now form an important part of estate planning and an inheritance tax mitigation strategy. This is particularly pertinent given the fact that the receipts from inheritance tax the government will receive will continue to reach new heights in the years ahead – more families are paying more tax.
In order to take advantage of this opportunity you must first check your existing pension provider offers the flexibility these changes allow, that is to say they offer beneficiaries’ and successors’ “flexible access drawdown” and don’t just automatically pay out any death benefits as a lump sum and thereby inflate the value of a recipient’s estate. Assuming this the case, you should make sure you complete a death benefit nomination form (also known as the “expression of wish” form). Although not legally binding on the pension scheme, it helps to guide the scheme’s administrators or trustees. They will rely on the most recent nomination form and as these forms can normally be changed at any time, it’s crucial that they are kept up to date.
Pensions – The Inheritance Tax Exemption
The inheritance tax exemption for pensions makes it even more important that nomination forms are correctly completed. This is because if you want someone, other than a dependent, to inherit and would like them to the have the option of inherited drawdown, you must name them on the nomination form – this is not the case for payments of lump sum death benefits. Issues can also arise where a trust is nominated to receive death benefits, though this can be highly appropriate in a number of different scenarios.
Nomination Forms
It is often possible for you to attach a signed letter to your nomination form(s) explaining your preferences. Doing so, however, has the potential to make matters worse rather than better as there is then the danger that it causes confusion and leads to an outcome you didn’t intend. The key point to note though is that nomination forms need to be regularly reviewed and updated in order to clearly reflect your current wishes and changing circumstances.
Pensions often form only part of the overall financial picture. A strategic financial plan incorporating all aspects of your financial planning, with clearly defined objectives, is critical to ensure “joined up thinking”. Accepting professional help and guidance can add significant value and means you enjoy the peace of mind of knowing that all the options have been considered and the best possible plan is constructed, tailored specifically for you.
To quote the renowned American businessman, Alan Lakein, “Planning is bringing the future into the present so that you can do something about it now”. Good advice.
Author: Paul Newton FPFS, CertPFS (DM & Securities), STEP Affiliate, CertPMI is a Chartered Financial Planner for Castlegate Financial Management Limited, a firm of Independent Financial Advisers and Chartered Financial Planners, authorised and regulated by the Financial Conduct Authority (FCA). 8 Castlegate Grantham Lincolnshire. 01476 591022. Tax and legal advice are not regulated by the FCA.
