With effect from 6 April 2015, if a pension scheme member dies before the age of 75, his or her pension benefits can be passed on to beneficiaries either as a lump sum or as a regular income free of both inheritance tax and income tax.
Furthermore, the benefits received will not be taken into account in calculating the beneficiary’s own pension lifetime allowance.
Unless the beneficiary needs a lump sum to pay off a debt or mortgage or to fund some other expenditure, there are good reasons for taking the income option even if the scheme member dies after the age of 75 (as most people do).
Any withdrawals from the fund by the beneficiary will then be subject to income tax at 45% in the tax year 2015/16 and at their personal rate in later years. But the major advantage is that the pension fund, which will continue to receive virtually tax-free growth, will be able to pass between generations free of inheritance tax.
The same tax treatment will apply to the next generation, so if the first beneficiary dies before age 75 any income or lump sum withdrawn from the fund would be tax-free.
This highly advantageous situation could go on indefinitely, provided that politicians do not change the rules yet again – though one would hope that the chance of retrospective legislation should be remote.
For the time being, however, passing pension benefits between generations should be regarded as essential tax planning for many families. To make it work to best advantage, however, it is essential that the pension holder should formally notify the pension provider of the persons they wish to nominate as beneficiaries by completing and reviewing their death benefit nomination forms.
How Nelsons Can Help
If you wouild like to discuss any the points raised above, please contact Phil Terry, an Independent Financial Adviser in our Investment Management Team on 0800 024 1976 or via our online form.