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As detailed within our previous articles, under the new pension rules, the door has been fully opened to allow pension death benefits to be passed on to the next generation.
Regardless of whether you have started to draw a pension, your remaining pension fund can be passed on tax-free after 6 April 2015, if you die before the age of 75.
The main point to note, is to whom you can choose to leave your pension fund to benefit from these rule changes, is that the term financially dependent has been removed and replaced with the term nominated beneficiary. Your nominated beneficiary(s) can use it to provide a flexible tax-free income or a tax-free lump sum.
If you die on or after the age of 75, nominated beneficiaries will be able to access the pension funds in a flexible manner paying income tax on any withdrawals they make at their marginal rate of income tax. Alternatively it can be taken as a lump sum less 45% tax, dropping to marginal rate of income tax from 2016/17.
Pensions are not normally subject to inheritance tax since they generally fall outside of the estate.
The average life expectancy at age 65 in the UK is 86 for men and 89 for women, so the government estimates most people will survive the age 75 threshold. * Source Office for National Statistics
Taking an example of how the new legislation will work:-
Bill Boots dies with a pension fund of £900,000 at the age of 86 and has 3 children to whom the fund has been left, John, Karen and Paul.
To illustrate the flexibility, as the eldest John is a 40% tax payer and his children have left home. He keeps his share of the fund for himself and decides not to draw on it until he retires. His view is that this will build up a nice tax free fund outside of his estate for his children whilst he still maintains control for a rainy day.
Karen is a stay at home mum and therefore is able to take some income from the pension fund to use up her personal allowance without paying further income tax.
Paul has two children at university, is a 40% taxpayer and therefore decides that if the trustees are in agreement his share should be diverted directly to the children to assist with university fees, allowing them to withdraw the fund at nil rate income tax.
The funds that were Bill Boot’s even on this first death post 75 are passed to his family where income is taken tax efficiently either at nil or basic rate income tax. The funds are then available to the nominees successors, as they choose, subject to the tax postion determined by the age of the nominees death. This creates a cascade of wealth through the generations.