Inheritance tax and pensions

Inheritance tax (IHT) isn’t usually applied to registered pension arrangements, however there are certain situations and actions that you should be aware of to avoid a potential IHT liability.

Incidentally, funds held within the NEST pension scheme are not currently exempt from IHT.

Pension contributions

Pension contributions, once paid, are typically outside the member’s estate. However, you should be aware that when contributions are paid by the member whilst in poor health and death occurs within 2 years of making them, HMRC could treat the contributions as transfers of value and take them into account for IHT purposes. This only applies when the contributions are seen to be Pension‘substantial and unusual.’

Death benefits

There are some situations where pension death benefits would be included for IHT purposes:

  • Member’s estate is legally entitled to receive the death benefits.
  • Lifetime transfers of death benefits within two years of death.
  • Where the member has an unrestricted right to bind the trustees or administrators or had the power to direct that the death benefits be payable to a certain person or to their own estate.
  • Pension and annuity arrangements are exempt under the Inheritance Act 1984 from initial periodic and exit charges normally applied to property held inside a discretionary trust.

Annuities

Although annuities are typically not subject to IHT, there are two areas where IHT does apply to annuities:

  • Annuity payments continuing under a guarantee period and payable to the estate as of right.; the market value of the remaining payments is included in the estate.
  • If the annuity is protected and the remaining lump sum is payable to the estate, the amount is included in the estate for IHT purposes.

What should you think about?

Although your pension scheme is there to provide for your retirement, there are clearly important considerations in relation to what happens when a member dies, including the impact of IHT on your estate. We would, therefore, recommend that you seek professional advice from your financial planner to make sure the death benefits on your pension are carefully organised.

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