Saving into a pension can be a great way to make sure you have enough money to live comfortably after your retirement. However, a well-saved pension can also make sure that you look after your family after you are gone. Many people do not realise that a pension can mean your family can receive your pension pot. This pension pot can often be passed on completely Inheritance Tax-free… However, what is Inheritance Tax and why do we pay it? Is it worth saving into a pension to avoid paying this tax?
We are here to provide some free pension advice. Learn how your pension can save you and your family Inheritance Tax.
What Is Inheritance Tax?
Inheritance Tax is a levy that is applied to items in your estate after you pass away. This will include your property, money and all of your belongings. The government will collect a certain amount of Inheritance Tax depending on how much your entire estate is valued at. It may also depend on who your beneficiaries are. If your estate is made up of agricultural land, then you may see some tax relief or exemptions. This will also be the case if you leave a large portion of your estate to charity. The threshold for paying Inheritance Tax will be completely different if you leave your estate to your children instead of your spouse, and vice versa.
There are so many factors which can affect how much Inheritance Tax you pay on your estate.
Why Are Some Pensions Not Affected By Inheritance Tax?
There are some stipulations for when an estate will and when an estate won’t pay Inheritance Tax. If the accumulated worth of your estate sits outside of these thresholds then you may get away with passing the whole amount on without paying any tax.
The rules surrounding how much Inheritance Tax you may have to pay are as follows:
- Should your total estate be worth less than £325,000 then you will not be charged any Inheritance Tax.
- If your estate is worth more than the £325,000 figure, but you leave the whole amount to your spouse, civil partner or a charity, then Inheritance Tax will not apply.
- As an individual whose estate is worth more than the £325,000 figure and is not leaving it to one of the aforementioned individuals/organisations, then you will need to pay a rate of 40% Inheritance Tax.
- If you leave more than 10% of your estate to charity from estates valued at more than £325,000 then you will pay a reduced rate of 36%.
- If you leave your home to your children or your grandchildren then the threshold for paying Inheritance Tax will rise from £325,000 to £450,000.
However, all of that said, pensions actually aren’t part of your estate. They, therefore, don’t count towards your Inheritance Tax threshold when you die. This is a common misconception.
How Your Family Can Inherit Your Pension Tax Free
The information surrounding inheriting pension money can be convoluted and often difficult to understand. We can provide you with some simple facts and free pension advice. You can use this free pension advice in order to pass your pension fund onto your family when you die. There are some things you will need to remember. Any cash you have taken out of your pension fund as a lump sum before you die will be counted as part of your estate. Therefore, it may be affected by Inheritance Tax.
Here are some of the top ways your family can inherit your pension fund free of tax:
- If you die before you are 75 and have money still left in your pension pot, your beneficiary can claim this fund and pay no tax if they claim it within a 2 year period. If you die after 75 then they will be charge Income Tax on the amount.
- Should you have an Adjustable Income pension and die before you are 75, the beneficiary can claim this without paying any tax at all. Again, if you are over 75 then the will have to pay Income Tax.
- If you have a Pension Drawdown then, assuming you die before you are 75, your beneficiary will be able to access the pension pots. They may inherit these either as a tax-free lump sum or as tax-free drawdown payments.
If you die after you are 75, then your family may need to seek impartial, free pension advice. Our pension advisors in Scotland can provide this service if needed.
Get More Free Pension Advice
For more, free pension advice you can check out some of our other articles over on the Latest News page. If you would like more individualised, independent pension advice then you can always try our Retirement Planner Tool. Tell us what you want from your pension and our pension advisors UK will make sure to get in touch with you as soon as possible. We can provide you with some valuable independent pension advice.