- DC pensions can be passed on to beneficiaries IHT-free
- Some pensions allow those who inherit them to take them as drawdown as well as lump sums
- Proposed LTA changes, lack of drawdown options and annual limits may mean a pension is not the only way you should pass on assets
Defined contribution (DC) pensions can be passed on to beneficiaries free of inheritance tax (IHT) so, as well as being a sensible way to save, they can be an efficient way to pass on assets. The planned abolition of the £1,073,100 pensions lifetime allowance in April next year arguably makes them an even more attractive way to do this.
If you die before age 75, beneficiaries who inherit your pension can take lump sums or income from it free of income tax. If you die after that age, beneficiaries who take lump sums or income from the pension will be taxed at their marginal income tax rate. But in both instances, there is no IHT to pay. So wealthy investors in particular “may be better off using up other sources of capital [such as] amounts held in individual savings accounts (Isas) to deplete their chargeable estate in priority”, notes Tom Minnikin, partner at tax consultancy Forbes Dawson.