WEEKEND WEB: Pensions and their death benefits

Scott Woods
Scott Woods
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MONEY MATTERS: By Scott Woods

Pension funds now play a much greater role in transferring wealth between generations, thanks to changes in how death benefits are taxed and who can benefit. The way in which wealth is being used to provide an income in retirement is changing too, with pension funds being preserved and income being taken from other savings first. This means there’s likely to be much more pension wealth now being shared.

With this in mind, it’s crucial that your wishes on what you want to happen to your remaining pension fund on your death are identified and everything is in place to get money in the right hands with the least amount of tax payable. To achieve this means having the right pension, with the right nomination, at the right time.

It’s now possible for anyone to be nominated to inherit pension funds, not just ‘dependants’. Inherited drawdown allows pension wealth to pass to anyone and remain within the pension wrapper, available to them as and when they need it, rather than it being paid as a lump sum. There’s no requirement for them to wait until they reach age 55 to access it.

Conventional wisdom of using the pension as the primary source of income in retirement (with other non-pension savings earmarked as a legacy for future generations), has been turned on its head. This means the pension pot remaining on death is potentially higher, having only been accessed once other savings have been spent.

Accessing savings in this order means non-pension savings (such as ISAs, OEICs and bonds) are used to provide an income, reducing the amount of savings which may be subject to IHT. At the same time, pension funds, which are IHT free, are preserved.

• The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Tax treatment varies according to individual circumstances and is subject to change.