Home Business Insights & Advice How to leave your pension to a loved one

How to leave your pension to a loved one

by John Saunders
6th May 21 2:22 pm

When looking at the best options available for pension schemes, many people tend to consider only their living years. This is perhaps understandable – it is not always easy having to think about what will happen to your finances, after you have passed on. Most people want their unused pension funds to go to their loved ones. But will that necessarily happen automatically with a pension? And if not, how can you ensure your pension fund goes to the person of your choice?

Current pension regulations and taxation

In 2015 there was a huge overhaul in pension regulations. The good news is that the changes in pension rules make it possible to leave your pension fund to any beneficiary of your choice (before the 2015 act, you could only leave your fund to those people who were financially dependent upon you). More than that, as your pension pot is not part of your estate, it is not taken into account under the normal tax inheritance rules (1). Passing finances on through your pension can be very tax efficient as you will not have to pay the usual 55% death tax.

Basically, taxation is dependent on how old you are when you die:

  • If you die before you are 75, your beneficiaries will inherit your pension fund completely tax-free
  • After the age of 75, beneficiaries will pay income tax on any withdrawals made from the pension fund you left.

How do I ensure my pension fund will be passed on appropriately

The most important thing to remember is this will not happen automatically, so you need to clearly state who you wish the pension fund to go to, in the event of your death. You need to give specific contact details to the pension provider.

Also, you need to be sure that the type of pension you have, will allow you to pass the funding on. The rules apply to those people who have kept their money invested or are on income drawdown. If you have an annuity, it either needs to be on joint-life basis or has a guarantee period. If you are unsure, it is strongly advised to speak to a regulated pension advisor to get the greatest benefit from your pension and to keep your loved ones safe.

How much money will I pass on through my pension

This is of course primarily dependent on the size of your pension fund, the age you will be when you pass it on, and the type of pension scheme you have. Also, over the time that you have a pension, government rules will change meaning the size of the fund available to your beneficiary may increase or decrease (i.e., taxation may increase). 

No doubt, you will be looking to ensure your loved ones will be financially safe when you are no longer around to provide for them. It is therefore a good idea to get into the habit of keeping a keen eye on how your pension is growing and how it may be affected by new laws. One new law that may affect final monies available: individuals in the UK are now allowed to access their pensions from the age of 55. This provision can have enormous benefits to your lifestyle but remember to track any changes made to your overall pot in terms of future needs, releasing money from your pension from age 55 could leave you a lot worse off in retirement. Again, a regulated financial advisor can offer a great deal of support in navigating this complex area.

Before looking at options for your pension, consider using a regulated financial adviser like Portafina or, view the guidance information at Pension Wise.

 

  1. Note changes to tax rules can occur at any time and each person’s individual circumstances will determine what tax is administered.

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