A pension is a long-term investment. Its value can go down as well as up and could be worth less than was paid in. Laws and tax rules may change in the future. Your own circumstances and where you live in the UK will also have an impact on tax treatment.

What is Inheritance Tax?

Inheritance Tax (IHT) is a tax on your estate that applies when you die. Broadly speaking, your estate is your property, money, and belongings, less any debts. Gifts that are given less than 7 years before you die will also usually be added to your estate to work out if any IHT is due, unless they are exempt, like a gift to your spouse or civil partner.

Not everyone has to pay Inheritance Tax. There is normally no need to pay tax if:

  • The value of your estate is below the £325,000 threshold (this is known as the nil rate band)
  • You’re married or in a civil partnership and leave everything above the threshold to your spouse/partner
  • You leave everything above the threshold to an exempt beneficiary, like a charity, community club, or political party

Everything above the £325,000 threshold might be liable for tax at the standard rate of 40%.

However, if you pass on your home to your children or grandchildren, your individual threshold can rise by up to £175,000 (the residential nil rate band) to a total of £500,000.

For example

If your estate is worth £525,000 and your IHT threshold is £325,000, then everything above that threshold — £200,000 (£525,000 - £325,000) — would be charged tax. In this case, the tax would be £80,000 (40% of £200,000).

It may be possible to transfer any unused nil rate band and residential nil rate band to a surviving spouse or civil partner. So, if you are part of a couple, you could have a threshold of up to £1,000,000 to use on your estate when you die.

Are pensions subject to Inheritance Tax?

Inheritance Tax usually doesn't apply when you pass on your pension pot. This is because, unlike other investments, your pension plan isn't normally part of your taxable estate.

That's why it can be tax-efficient to keep your pension savings invested within your pension plan and pass them on to family members or down to future generations. In addition to the potential savings on IHT, you may also get tax benefits on any future investment returns. Beneficiaries (those you want to pass your money onto) may be able to receive tax-free withdrawals if you die before the age of 75.

It's important to bear in mind that money you take out of your pension pot could form part of your estate if, for example, you don't spend it and it's still in your bank account.

Money left in your pension savings can be passed on to your dependants or family tax-efficiently, depending on:

  • the type of pension plan it is
  • that you've nominated who you wish to receive the money (your beneficiaries); your will won't do this for you
  • your age when you die, as your dependant could pay income tax on any income they take from your pension pot

Can I choose who inherits my pension savings?

You'll need to tell your pension provider who you wish to be considered as your beneficiaries. They will take this into account when deciding who to pay your pension savings to, but may not be bound by your wishes.

You can also ask for a family trust or your favourite charity to be considered instead. If you are thinking about adding a trust as a beneficiary, you may wish to get financial and/or legal advice on the best type of trust for your needs.

It's important to check that your beneficiary arrangements are up-to-date, especially if you have multiple pension plans. This is because your beneficiaries may be different for each one. You may want to consider transferring your pensions into one plan to help make it simpler to manage and ensure all your arrangements are accurate.

Bear in mind that transferring pensions isn't right for everyone. If you're interested in transferring your pensions into a single pot, find out more about pension transfers and the things you should consider.

I have a Standard Life pension plan - how do I manage my beneficiaries?

If you have a Standard Life pension plan and want to add or update your beneficiaries, you simply need to login to your Dashboard , select 'Your Details', then 'Pension Details', and click 'Edit' next to 'Beneficiaries'.

Does my will affect who inherits my pension savings?

Your will doesn't directly cover the money in your pension pot, nor who inherits it. However, it's a good idea to keep your will up-to-date because it can be a helpful tool to resolving any disputes, should they arise. Our article 'Can you leave your pension savings to your loved ones?' has more useful information about this.

What happens to my pension savings when I die?

When you die, any remaining funds in your pension pot can be used to provide benefits for the people or causes that you care about.

What are death benefits?

Most modern, flexible pensions tend to come with what are called 'death benefits'. Death benefits are features that take effect when you die, such as giving the money that's left in a pension pot to your family. These benefits might change depending on which provider you're with and what age you are when you die, so it's worth checking with them.

Not all pension plans have death benefits. If yours doesn't, you could think about transferring your plan into one that gives you a full range of death benefits.

Remember that pension transfers won't be right for everyone, for example if you're in ill health. Your pension plan might also have important benefits or guarantees that you could lose by transferring, so it's worth comparing your options.

To find out more about transferring your pension, read our Pension Transfer guide.

Will my beneficiaries pay income tax on the pension savings I pass on?

Flexible pensions usually let you pass on your pension savings to your beneficiaries, tax-free if you die before you reach 75. After age 75, your beneficiaries will normally pay income tax at their own tax rate on anything they take out of the pension plan.

How can Standard Life help?

At Standard Life, we can help by setting up a plan for this money to be taken out as and when your beneficiaries need it. If you want to leave a pension plan to someone after you die, find out more about what happens to your pension when you die and the options you have.

Passing on your pension savings: What to consider

Here are three things to think about before you get started:

  1. Check if your pension savings are outside your estate. Your provider should also be able to tell you if it has the full range of income flexibility and death benefit options you need.
  2. If not, you could think about transferring to a pension plan that does. Be aware if you’re in poor health it might not always be a good idea, as the pension plan could be liable for inheritance tax if you die within two years of transferring. You should also make sure you won’t lose any valuable benefits or guarantees.
  3. Tell your pension provider who you want to be considered as a beneficiary. They will take your wishes into account but may not be bound by them. Be sure to review your choice regularly, especially when you reach 75. That's when income tax will start to apply.

It's worth speaking with your pension provider or your adviser about all of these points. It's an important thing to get right so you make the most of your retirement savings.

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We recommend you seek appropriate guidance or advice before you make any decisions. You can also get free impartial guidance, including help finding an adviser, on the MoneyHelper website

Remember, if you're over 50 you can get free impartial guidance from Pension Wise, a service from MoneyHelper. Visit the MoneyHelper website or call 0800 138 3944.

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