Saga Investment Services between 24th and 25th June 2016, with the help of Populus, a member of the British Polling Council, carried out a survey of over 50s who hold a private ‘defined contribution’ pension and are currently using flexible drawdown with their savings. The findings were based on a sample of 1915 people of which 865 were over 50.
What was revealed is that a growing number of over-50s, in fact 1 in 4, are planning to leave some of their pension behind to loved ones. The average pension gift is set at around £51,000.
Under the pension freedoms introduced in April 2015, new tax rules were applied to any remaining savings left in someone’s pension after they died.
For someone dying under the age of 75 the following tax rules apply:
- A pension can be inherited tax free by an heir as a lump sum
- A pension can be received in drawdown, or an annuity can be bought, with the income paid from either tax free
- A lump sum must be taken within two years of the death, otherwise the payment is subject to income tax at the inheritor’s personal tax rate.
- Annuities or drawdown must be taken by the beneficiary from an ‘untouched’ pot (where someone has died and didn’t take any money from their pension) within two years , otherwise the income will be taxed at the beneficiary’s personal tax rate.
For someone dying at or after age 75 the following tax rule applies:
- Any inherited pension is taxed at the beneficiary’s personal tax rate
Despite the desire to pass on their savings the research shows that there is widespread confusion about how tax rules affect ‘passed on’ pensions. Around 22% believed only their spouse could inherit the funds. Less than 42% knew that remaining pensions could be left to anyone they nominate. The rest did not know who could inherit left over pension savings.
There was also evidence of a lack of understanding on the taxation of inherited wealth. Only 18% were aware that no tax would be payable on inherited savings if the pension owner died under the age of 75. Saga also found a similar picture relating to those dying over the age of 75 with only 19% knowing that the tax paid would depend on the beneficiary’s personal income tax rate.
Gareth Shaw of Saga Investment Services commented as follows:
“Thanks to the changes made in April last year, pensions have become a far more attractive way to pass on your wealth and bypass Inheritance Tax (IHT). Typically, pension savings are ringfenced from IHT, and therefore people could inherit significant sums either paying a lower amount of tax or no tax at all, depending on their income and the amount they inherit.
If anyone is thinking of passing on their pension, it’s important that they complete an ‘expression of wish’ form with their pension provider and nominate who they want their pension to go to.
However there is a balance to be had here-the desire to pass on money from a pension should not overpower the need to have financial comfort in retirement. With any inheritance tax planning, be it pensions or other assets, professional advice will be essential to help consumers get that balance right.”