Would You Like To Use Your Pension To Eliminate Inheritance Tax On Your Demise?

Nov 10, 2015 | Tony Byrne's View

Since the start of this tax year (6th April 2015), a new pensions regime is in place, known as Pension Freedom. The best known benefit is the ability for savers to access 100% of their money purchase pensions. One of the other significant benefits that is not as well known, is the new ability to pass on pension assets outside of the saver’s estate for Inheritance Tax purposes. This means that overnight pensions offer wealthier people a tremendous opportunity to legally avoid Inheritance Tax!

The following 6 steps show how anyone with a pension and total assets that exceed the tax free Nil Rate Band of £325K (£650K for a married couple) can reduce the effect of death taxes by simply rearranging their assets and prioritising their spending.

  1. Maximise your pension contributions.The current annual contribution allowance is £40,000 but you can use the last 3 years’ unused contributions and make a larger contribution in the current tax year, as long as you have the earned income to support the payment.
  2. Beware of the Lifetime Allowance limit Not only is there a contribution limit but also an overall cap on how much you can have in your pension of £1.25m which falls to £1m from 6th April 2016. The tax penalty on exceeding this limit are high. So make sure you are not in danger of exceeding this limit.
  3. Make sure you can live on your non-pension assetsWhen you die you want to minimise your non-pension assets above the tax free £325K Nil Rate Band (£650K for married couples). You could use savings and investments to generate income rather than your pension.
  4. Consider giving away assets If your pension is well funded and you have sufficient non-pension income to live on, think of reducing IHT by giving assets away. This will reduce your IHT further.
  5. Consider Inheritance Tax efficient investmentsSome investments become 100% Inheritance Tax free after 2 years because they qualify for a tax relief known as Business Property Relief. You need to take advice on these investments because they can be high risk.
  6. Write a will It is vitally important to at least draft a will. You should regularly review and update your pension death benefits nomination too.

To find out more, why not take advantage of a our free financial health check worth £470 to the first 10 people who contact us before 9 December 2015. This offer is subject to qualifying conditions. We offer a great cup of coffee too! Ring us on 01908 523740 or email wealth@wealthandtax.co.uk.

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