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A person’s pensions do not form part of their estate when they die and therefore are not subject to inheritance tax. The hefty 40 percent tax applies to any total assets in a person’s estate above the value of £325,000 for individuals, or £650,000 for couples.
More Britons are being caught by the tax with the rising price of properties and other assets with the thresholds left unchanged in the Autumn Statement last year.
Wealthtech firm True Potential has urged people to look at maximising their annual allowance for pension contributions, potentially saving them and their heirs large sums of money.
Money put into private pensions is not subject to income tax while helping reduce the size of a person’s estate that could be hit by inheritance tax when they die.
The annual allowance for pension savings is currently £40,000 and any contributions over this amount will be taxed.
Daniel Harrison, CEO of True Potential, said: “Maximising your pension contributions can be a great way for consumers to minimise the inheritance tax hit that their loved ones will face when they die.
“The potential investment growth, often higher than high street bank account rates, also makes this an attractive option to consider.
“However, I would always recommend for people to speak to a financial adviser before making any investment decisions as the best options will vary on a case by case basis and an adviser can tailor an approach to what is best for you.”
Investing funds in pension schemes also has the benefit of earning a saver compound interest, as they eventually earn interest on the initial interest they earn on the amount, with their pot growing over time.
Another tip from the wealth management firm for savers is to make sure they have an Expression of Wish in place for their pension.
This simple document tells the pension provider who they want to inherit the money from their pension savings.
This can often be arranged in a 98 percent, one percent, one percent format, with a person’s spouse or partner inheriting 98 percent of the scheme while each of their children receive one percent each.
The idea of this arrangement is that when the person with the 98 percent dies, the Expression of Wish will indicate who should then inherit the pension.
If a person with two child allocates one percent to each of them in the Expression of Wish, each of the children will likely receive 50 percent of the pension when the person with the 98 percent dies.
Mr Harrison said: “The benefits of keeping an inherited pension alive as a beneficiary pension are clear.
“This is why we’ve been speaking with all of our clients to explain the importance of completing an Expression of Wish.
“We’ve also been encouraging them to speak with their beneficiaries to provide them with information to ensure they make the right decision.”
A person may want to look at consolidating their pensions into one if they have multiple schemes open.
This often happens if a person has changed job several times and so has signed up to different pension schemes throughout their career.
An individual may want to refer their loved ones to their pension provider to talk through their options in more detail.
It will often be more tax efficient for the inheritors to keep the money in the form of a pension rather than cashing it in, as in this case it becomes subject to inheritance tax.
The group gave the example of someone who inherits a pension pot of £30,000 at the age of 40 and plans to retire at 60.
This means the pot could benefit from 20 years of growth, and with an annual growth rate of six percent, the amount would grow to £96,214 when they retire.
Mr Harrison said: “With pension savings rates too low, planning ahead can help those we want to inherit our hard-earned cash to secure their own future.”
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