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One in four planning to leave some of their pension behind to loved ones
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Average pension ‘gift’ set at £51,000
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Yet there is widespread confusion about how tax rules affect ‘passed-on pensions’
The investment and financial planning specialist surveyed over 50s with a private, ‘defined contribution’ pension who were currently using flexible drawdown with their savings. One in four (25%) stated that they were planning to leave on average 56% of their pension behind. In cash terms, this came to around £51,000 on average.
Under the pension freedom introduced in April 2015, new tax rules were applied to any remaining savings left in someone’s pension after they died. For someone dying under the age 75, their heirs can now inherit their remaining pension tax free.
For someone dying over the age of 75, any inherited pension is taxed at the beneficiary’s personal Income Tax rate. For the full rules, see notes to editors .
Despite the desire to pass on their savings, however, Saga found confusion among over 50s surrounding who they could pass on their pension to and how it would be taxed.
Around one in five (22%) believed only their spouse could inherit the funds. Less than half (42%) correctly stated that remaining pensions could be left to anyone they nominate. The rest didn't know who could inherit left over pension savings.
And understanding on the taxation of inherited pension wealth was low. Less than one in five (18%) correctly stated that potentially no tax would be due on inherited savings if the pension owner was under the age of 75 at death. The majority either didn’t know or believed it depended on the beneficiary’s Income Tax rate. If the original pension owner died over the age of 75, Saga found similar results – less than one in five (19%) correctly believed that the tax paid would depend on the beneficiary’s Income Tax rate.
The survey found that just one in four (25%) people planning to pass on their pension had taken professional advice on the issue.
Commenting on the findings, Gareth Shaw, Head of Consumer Affairs at Saga Investment Services, said: “Thanks to the changes made in April last year, pensions have become a far more attractive way to pass on your wealth and bypass Inheritance Tax (IHT). Typically, pension savings are ringfenced from IHT, and therefore people could inherit significant sums either paying a lower amount of tax or no tax at all, depending on their income and the amount they inherit.
“If anyone is thinking of passing on their pension, it’s important that they complete an ‘expression of wish’ form with their pension provider and nominate who they want their pension to go to.
“However, there’s a balance to be had here – the desire to pass on money from a pension should not overpower the need to have financial comfort in retirement. With any inheritance tax planning, be it pensions or other assets, professional advice will be essential to help consumers get that balance right.”
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