One in four aged over 50 plans pension 'gift' of £51k
One in four people aged over 50 plans to leave some of their pension behind to loved ones, research from Saga Investment Services has found.
The average planned pension ‘gift’ is £51,000, yet there is widespread confusion about how tax rules affect passed-on pensions.
The investment and financial planning specialist surveyed over 50s with a private, defined contribution pension who were using flexible drawdown on their savings.
One in four (25%) stated that they were planning to leave, on average, 56% of their pension behind. In cash terms, this came to around £51,000 on average.
The news comes as the Government reveals that consumers have taken more than £6 billion from their pensions under the new pension freedoms introduced in April 2015.
Since that date, new tax rules have applied to any remaining savings left in your pension after you die. If you die under the age 75, your heirs can now inherit your remaining pension tax free. For someone dying over the age of 75, any inherited pension is taxed at the beneficiary’s personal income tax rate.
Despite the desire to pass on their savings, however, Saga found confusion among over 50s surrounding who they could pass on their pension to and how it would be taxed.
Around one in five (22%) believed only their spouse could inherit the funds. Less than half (42%) correctly stated that remaining pensions could be left to anyone they nominate. The rest didn't know who could inherit left over pension savings.
“Professional advice will be essential”
Gareth Shaw, head of consumer affairs at Saga Investment Services, says: “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.
Typically, pension savings are ringfenced from inheritance tax, and therefore people could inherit significant sums either by paying a lower amount of tax or no tax at all, depending on their income and the amount they inherit.”
Anyone thinking of passing on their pension, should complete an ‘expression of wish’ form with their pension provider and nominate who they want their pension to go to.
Mr Shaw adds: “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.”
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Defined contribution pension
Often referred to as a “money purchase” scheme, although offered by employers (who may pay a contribution) these pensions are more likely to be free-standing schemes that a person contributes to regardless of where they are employed. Here, the level of benefit is solely dependent on the accumulated value of the contributions and their performance as investments. Therefore, the scheme member is shouldering the risk of their pension, as the scheme will only pay a pension based on the contributions and investment performance. The final pension (minus an optional 25% that can be taken as tax-free cash) is then commonly used to purchase an annuity that would provide an income for life.