As well as supporting you through retirement, pensions can be a very tax-efficient way of passing on your wealth.

Money left in your pensions can be passed on to anyone you choose more tax-efficiently than ever, depending on:

  • The type of pension you have.
  • You nominating who you would like to leave your pension savings to — your Will won't do this for you.
  • Your age when you die — before or after the age of 75.

The right type of pension?

A modern, flexible pension offers a wide range of death benefits.

With this type of pension you can pass on your pension, normally tax free if you die before age 75. After age 75, your beneficiaries pay tax at their highest income tax rate.

If you don't have a modern, flexible pension, you might consider transferring your pension into one that offers the full range of death benefits.

Transferring isn't right for everyone, particularly if you are in ill-health, so it's important to take financial advice. Your existing pensions may also have valuable benefits or guarantees you would not want to give up.

Nominate who you would want to benefit

Because your pension savings are not covered by your Will, you need to make sure your pension provider knows who your nominated beneficiaries are. They will take this into account when deciding who to pay your pension savings to.

  • This gives your beneficiaries more choices about how they receive your pension savings — either as a lump sum or income.
  • Those beneficiaries can also nominate the next generation of beneficiaries to pass the pension pot to when they die. This allows pension wealth to be cascaded down the generations, with fully flexible access.
  • You can nominate a family trust if that suits your circumstances.
  • If you don't have any dependants, you can choose to leave your pension savings to your favourite charity.

It makes sense to check your pensions and review your nominations regularly, especially when you reach age 75. This is when death benefits normally become taxable at your beneficiaries' highest rate of income tax.

You can nominate or update your beneficiaries online. Just log-in and manage your plan.

Pensions and inheritance tax

Inheritance Tax (IHT) can affect property, money and possessions.

Your pension is normally free of IHT, unlike many other investments. It is not part of your taxable estate.

Keeping your pension wealth within your pension fund and passing it down to future generations can be very tax-efficient estate planning.

It combines IHT-free inheritance with tax-free investment returns and potentially, for some beneficiaries, tax-free withdrawals.

Any money you take out of your pension becomes part of your estate and could be subject to IHT. This includes any of your tax-free cash allowance which you might not have spent.

Be aware that older style pensions may be inside your estate for IHT. Do check.

Find out more about inheritance tax on Gov.uk

Passing pension wealth on: 3 things to think about

It makes sense to talk to a financial adviser to help you plan ahead in the most tax-efficient way.

    1. Check whether your existing pension is outside your estate and offering the full range of income flexibility and death benefit options you need.
    2. If not, you may want to consider transferring to one that does. Just remember to make sure you're not giving up any valuable benefits or guarantees and think about taking advice. Transferring won't be right for everyone.
    3. Nominate your beneficiaries with your pension provider and review those nominations regularly, especially when you reach 75. That's when death benefits normally become taxable at your beneficiaries' highest rate of income tax.

Do contact your pension provider or your adviser to talk about this. It's an important thing to get right so that you make the most of your retirement savings.

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Your pension is an investment and can go down as well as up in value. You could get back less than was paid in.

Tax rules can change and what it means for you will depend on your circumstances and where you live in the UK. This information is based on our understanding in February 2019.

Access to impartial guidance

We recommend you seek appropriate guidance or advice before you make any decisions. An adviser is likely to charge a fee for this. You can also get free impartial guidance over the phone or face to face with Pensionwise. Go to pensionwise.gov.uk or call 0800 138 3944. Make sure you understand all your retirement options by reading the Money Advice Service guide – Your pension - it’s time to choose

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