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6 in 10 Brits are unaware their pension is usually outside of their estate

Many people could be omitting a useful way to pass on assets when they die because they aren’t aware that pensions usually fall outside of their estate. It could also mean some have failed to name a beneficiary for their pension. Read on to find out what you need to know about pensions and why they could be a tax-efficient way to pass on wealth.

According to a survey carried out by PensionBee, 62% of people are unaware that their pension won’t usually form part of their estate when they die. As your pension may be one of your largest assets, the oversight could mean a significant proportion of your wealth isn’t passed on according to your wishes.

If your estate could be liable for Inheritance Tax (IHT) considering how to use your pension to leave wealth to your loved ones could be valuable.

Your will won’t usually cover your pension

Writing a will to set out who you’d like to receive your assets when you pass away is an important step when creating an estate plan. However, it’s important to note that pensions are not usually covered by your will.

Instead, an expression of wish is used to tell your pension provider who you’d like to receive your pension savings when you die. What you write will be a key influence when pension trustees are deciding who to release your pension savings to, but they may also consider other factors, such as whether you have any dependents.

You can name more than one beneficiary in an expression of wish and specify what proportion of your savings you’d like each person to receive.

If you have more than one pension, you’ll need to complete an expression of wish for each one.

You can often complete an expression of wish by logging into your online account and filling in a form in a matter of minutes. Just like with a will, it’s important to review your expression of wish regularly and following major life events to ensure it continues to reflect your estate plan.

Completing an expression of wish gives you a chance to state who you’d like to benefit from your pension and it could reduce how much IHT your estate pays.

Passing on wealth through a pension could reduce your estate’s Inheritance Tax bill

IHT is a tax paid on your estate when you pass away if its total value exceeds certain thresholds. As pensions typically sit outside of your estate, they may be a useful way to pass on wealth without increasing a potential IHT bill.

Yet, according to the PensionBee survey, 52% of people said they weren’t aware pensions are typically exempt from IHT. Around 6 in 10 over-55s said they hadn’t considered using their pension to reduce the size of their estate.

You may want to consider IHT as part of your estate plan if the value of your estate exceeds the nil-rate band. For the 2024/25 tax year, the nil-rate band is £325,000 and it’s frozen at this level until April 2028.

You may also be able to use the residence nil-rate band if you leave your main home to direct descendants. This allowance is £175,000 in 2024/25 and, again, is frozen until 2028.

You can pass on unused allowances to your spouse or civil partner. So, when you’re planning as a couple, you may be able to pass on up to £1 million before IHT is due.

If your estate exceeds these thresholds, the standard rate of IHT is 40% and it could substantially reduce the inheritance your loved ones receive.

There are often steps you can take to reduce a potential IHT bill, but you usually need to be proactive. One option might be to consider using your pension, because if you pass away:

  • Before the age of 75, the beneficiary who receives your pension won’t usually need to pay tax.
  • After the age of 75, your beneficiary may need to pay Income Tax. The tax rate will depend on their other taxable income and how they access the money. However, it could be much lower than the standard rate of IHT.

Tax rules around inherited pensions can be complex. Seeking professional advice could help you and your beneficiaries understand the tax bill they might face.

So, your pension could be a useful tool when you’re considering your estate plan. With the potential IHT benefits in mind, you might choose to:

  • Increase your pension contributions during your working life or continue to contribute after you’ve retired (up to age 75 and based on your earnings) to pass on more wealth tax-efficiently to your loved ones.
  • Deplete other assets to fund your retirement to reduce the value of your estate and preserve your pension to pass on to beneficiaries.

If you’re thinking about using your pension to effectively pass on wealth you might need to consider factors such as the Annual Allowance, which limits how much you can contribute tax-efficiently to your pension each tax year, or the effect it could have on your income now.

We could help you make it part of your overall plan, so you can understand the potential implications and what’s right for you.

Contact us to talk about your estate plan

An estate plan could help ensure your assets are passed on according to your wishes, provide you with security later in life, and potentially reduce an IHT bill. If you haven’t considered these important issues yet, please get in touch. We can work with you to create an estate plan that’s tailored to you.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate planning or Inheritance Tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts. 

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