Pensions - Resolve to Nominate

Pensions  - Resolve to Nominate

The recent change in the law relating to pension funds provides novel Inheritance Tax planning opportunities for what is frequently an individual’s second most valuable asset, their pension fund, but to take advantage of the change you need to take action.
 
The most fundamental change brought about by the new rules is the abolition of the 55% tax surcharge on the fund.
 
What this means is that an individual can now nominate any person (both adult and minor) to receive their pension when they die whether their fund is in income drawdown or not, without paying any additional tax providing they take some simple, inexpensive steps.
 
If the individual dies before the age of 75 then the nominated beneficiary will receive the pension fund Inheritance Tax free.
 
If the individual dies after the age of 75 then any withdrawals from the fund will be taxed at the beneficiary’s rate of income tax only.
 
The good news is that in both cases the pension fund falls outside the pension holder’s estate and potentially the beneficiary’s estate for Inheritance Tax purposes, depending on the way in which the beneficiary elects to receive their benefit.
 
Have you nominated your pension in trust? If so, and as a matter of good practice, you should ensure that a copy of your nomination is kept with your will.
 
A word of caution, if an individual fails to make a nomination and does not leave a valid will, then the trustees of the pension fund will pay the proceeds to the personal representatives and as such the Inheritance Tax saving will be lost as the pension proceeds paid to the personal representatives will form part of the deceased’s estate and, to the extent that the estate exceeds the Nil Rate Band (£325,000) be taxed at 40%.
 
The Government is considering whether probate fees should be charged according to the value of the estate. If an individual dies without a will and their pension is not nominated in trust then the consequence will be that both Inheritance Tax and increased probate fees may be payable on the value of the pension fund.  This consequence is a wholly avoided by effective Inheritance Tax Planning.
 
Should you wish to find out more about Inheritance Tax Planning then please contact Vanessa Whittington by email or telephone Vanessa on 01530 266000.