A pension is designed to provide an income throughout your post-work life, but many people are viewing the recent pension freedoms as a chance to pass on their wealth tax-efficiently, and are planning to hold back savings in their pension to pass on after they die.
Research from Saga Investment Services has highlighted this growing trend. The firm surveyed over-50s with a defined contention pension who are currently using flexible drawdown to access their savings, and found that 25% were planning to leave an average of £51,000 of their pension to beneficiaries (equating to 56% of their pension pot).
However, there's widespread confusion over how this can be achieved, particularly in terms of tax rules. Under the pension freedoms, new rules were introduced whereby any remaining savings in a pension can be passed on tax-free if the individual died before the age of 75, or if over 75, any inherited pension will be taxed at the beneficiary's personal income tax rate.
These rules don't appear to have become well-known yet, with just 18% of respondents correctly stating that no tax should be due on inherited savings if the pension owner was under the age of 75 at death. The majority either didn't know or thought it depended on the beneficiary's tax rate. Similarly, if the pension holder was over 75, just 19% believed that the tax paid would be based on the beneficiary's tax status.
There was also confusion over who could inherit the funds, with 22% believing that only their spouse was eligible. Almost half (42%) correctly stated that the pension could be left to anyone they wished, while the rest didn't know who could become beneficiaries.
Despite these misunderstandings, just 22% of those who are planning to pass on their pension have taken professional advice, which could mean they lose out on the benefits.
Gareth Shaw, head of Consumer Affairs at Saga Investment Services, commented: "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.
"However, there's 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."
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