What happens to pensions upon death is one of the biggest causes of confusion among retirees managing their own finances. So here are two of the most common questions we get asked, along with the answers:
Reader question: I have a large amount of unconverted pension (I haven't spent any of it) which in all likelihood will become part of my estate when I die. I was advised that upon death, the full value of any personal pension, if left invested, will be paid to the nominated beneficiaries and will not be considered as part of my estate for inheritance tax purposes. Although its 'full value' has a certain amount of discretion applied by the pensions companies. Is this right? IC answer: When you die, your personal pension plans will not normally form part of your estate, as long as your pension hasn't been vested (ie, no tax-free cash lump sum has been taken). This is because most personal pension plans were written under master trust arrangements, which means any payments are at the discretion of the trustees who look after the scheme. If you have taken all or some of the tax-free cash, under current rules tax would currently be paid at 55 per cent, regardless of whether a trust arrangement is in place (not all pension schemes have them). The government has said this rate of tax is going to reduce, but it is waiting until this year's Autumn Statement to announce it. |
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Reader question: I was told that an unconverted retirement annuity would require a trust to be set up to avoid the 55 per cent tax if over the inheritance tax threshold. IC Answer: Retirement annuity plans (RAPs) also known as Retirement Annuity Contracts (RACs), were a type of pension plan that individuals could take out before 1 July 1988. They are slightly different to personal pension plans, but they can also provide a 25 per cent tax-free lump sum. However, because RAPs and RACs are not 'master trusts' arrangements, any death benefits will form part of your estate when you die. Therefore, if your total estate is worth more than the nil-rate band for inheritance tax (currently £325,000), any excess estate value would be subject to inheritance tax at a rate of 40 per cent, instead of 55 per cent. A word of warning, however. When you die, many older-style contracts will refund your contributions, but not the returns on your investments. Sometimes they pay interest, but often they don't. David Smith at Bestinvest says you should consider writing pension death benefits from a RAP or RAC for the benefit of a trust. "Take the example of a personal pension plan - if the benefits were paid to the deceased's spouse there would be no tax implications whatsoever," he says. "However, if the spouse died two months later, the death benefit from the pension she received would simply form part of her estate for inheritance tax purposes. If the death benefit had been paid to a trust, which the wife could be a beneficiary of, it wouldn't." |
