Can your pension be used to cut your inheritance tax bill?

Current legislation allows for anyone who dies to pass over their pension cash without their heirs being liable for then handing over part of it to the taxman.

Somewhat of a lifeline to the rising number of middle-class savers whose families face being hit with an Inheritance Tax bill when they die.scissors-cutting-red-ribbon_1101-911

The Inheritance Tax levy charged is 40 per cent on estates worth more than £325,000 belonging to individuals, or £650,000 for couples; and is applied to property, investments and savings, although the introduction of the Main Residence Nil Rate Band has afforded some comfort to many.

However increased property prices mean thousands of ‘ordinary’ people are being dragged into this tax trap – initially aimed at the wealthiest.

Under newer pension freedoms, some people could escape having to pay inheritance tax for generations – because no inheritance tax is due on pensions.

Anyone inheriting pension cash from someone who dies before the age of 75 does not have to pay any tax at all.

Those who receive a pension from a loved one who passes away after the age of 75 will pay tax on money they withdraw at their normal rate of income tax.

The reforms also mean that anyone who is already taking their pension may also be able to pay £4,000 a year into a pension plan.

Those with larger estates may be able to top-up every year (provided they had not passed their individual lifetime allowance) to potentially reduce their family’s inheritance tax bill.

So, can your pension be used to cut your inheritance tax bill? Yes it can…

Pensions can be an effective tax planning tool – and have indeed become a new and valuable way of avoiding inheritance tax.

Your Chartered Financial Planner will be able to help you navigate these options if advantageous to your personal circumstances.

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