family financial plan

Can a Pension Be Passed On Following a Death?



Posted on: 28th March 2024

Thinking about inheritances when writing a will is not always a straightforward exercise. There tends to be more to consider when planning where your estate goes, who gets what, and how much. However, the real value and tax efficiency of working with independent financial advisers Manchester is that financial planning considers your retirement planning Cheshire and inheritance as a part of a long-term, family financial plan.

Passing On Your Pension

Which is more preferable? – 40% Inheritance Tax (IHT) or 20% Income Tax? Most pensions sit outside of your estate, meaning they won’t be liable for Inheritance Tax.

However, when they are eventually drawn down from or cashed in, the beneficiary may be liable for Income Tax. Unless they are an additional rate taxpayer, they will only be liable for 20%, so you’ll effectively be handing down an extra 20% tax saving on your following generation. Pension savings may be the biggest legacy alongside property you can leave behind for your family once you are gone.

If you can pass on your pension, it makes perfect sense to make pension advice Manchester with a financial adviser a valuable talk when discussing what you need during your retirement.

Children and Grandchildren

Your pension can do great things for the generations following you after you have passed. Defined Contribution pensions typically are not counted in a final IHT tally.

If you have accumulated a significant pension pot and other retirement assets, you may find more than you require for your retirement plans. The ability to pass your pensions on to your children or grandchildren could help them to realize certain life goals, including paying off a mortgage or university fees – or even helping them to finance their new business.

A pension does not have to be earmarked for a child or grandchild. It could be left to anyone you wish. One of the most common traits is leaving a pension to grandchildren other than a child so that they have better financial prospects for the future.

What Can and Cannot Be Passed Down

Your State Pension cannot be passed down, as well as a Final Salary or Defined benefit pension in the same way as a Defined Contribution pension. Defined Benefit pensions typically pay out to a spouse or nominated beneficiary if you were to die before them.

Sometimes, Defined Benefit pensions can be transferred into a pot held in a Defined Contribution scheme that can be passed on to an heir. However, you will need professional advice from independent financial advisers Cheshire if that transfer amount exceeds £30,000.

Do you need professional financial advice with your family financial plan? Contact our friendly team at Haven IFA to get your financial future secured.