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'Inheritance tax' on paper

Generation Game

11 August 2015

One in three people plan to leave a larger inheritance following April’s pension changes.

Recent changes to pensions are having a significant impact on how investors are planning to fund their retirement, according to new research.1

Private pensions that have already been used to provide benefits are not subject to Inheritance Tax (IHT); but, up until recently, a 55% Income Tax charge was usually applied when the nominated dependant received the proceeds. Alternatively, if the dependant received income from the inherited pension, this would be taxed at their marginal rate.

However, new rules introduced in April this year now allow a pension to be bequeathed to anyone – not just a financial dependant – and crucially, the intended beneficiary can receive the proceeds tax-free if the holder dies before the age of 75.

Saver behaviour

As a result of the changes, over a third (36%) of all private pension holders say they are now likely to leave a bigger inheritance to their children.

The research also shows 19% are more likely to increase investment into their pension, whilst 13% say they plan to transfer existing non-pension assets into pension savings.

Furthermore, 21% say they will use other assets, such as ISAs, to fund their retirement in an effort to preserve their pension for the next generation.

Tony Müdd, divisional director at St. James’s Place, says investors are starting to realise the added benefits of saving into a pension.

“A pension is now even more attractive because people can leave it to their children, and in certain circumstances it can be left tax-free. It means wealthier retirees who do not need their pensions to live on can ring-fence savings for their family.”

Design for life

However, Müdd says pensions were never originally conceived as a clever way to pass money on.

“A pension is designed to provide an income for the rest of your non-working life. For some wealthier people it might make sense to protect it for their children – but for the majority of people this is not an option because they need their pension to pay them an income.”

Müdd says the new rules bring greater opportunity but added complexity, so he urges anyone with a pension to seek financial advice before making any decisions.

“Clearly the changes to death benefits are a good thing, but there’s a danger people make decisions without seeking advice. There’s a real need for people to fully understand what they should do in light of all the new opportunities available.”

1 Investec Wealth & Investment, 30 June 2015

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

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