If the Chancellor takes your pension pot for IHT you might want to stay one step ahead
It’s fair to say expectations of anything less than doom and gloom from last month’s Budget were pretty standard as we recover from the economic blow that was Covid-19 - and it seems even if you die you have not escaped the Chancellor's notice for an opportunity for taxation.
Currently, there are around 24.6 “defined contribution” pension schemes, they are pretty common, so you probably have one - they are the ones you and your employer both pay in a monthly contribution, and that pot of money is invested in the stock market.
You can also claim tax relief when you put money into a pension - so for every £1 you save will only cost you 80p if you’re a basic rate tax payer. It’s 60p for a higher-rate tax payer and 55p if you’re in the top band.
All these reasons added together suggest defined contribution pensions are most popular with savers - so popular, more than 200,000 have transferred out of final salary pensions since 2015 when these pension perks were put into place - even though final salary pensions are more generous.
Why? Simply because another great perk is that your pension pot is also outside of Inheritance Tax (IHT), so it is not added to the value of your estate.
Current rules allow you to pass on that pot tax free to a nominated beneficiary - as long as you die before the age of 75. The worry is, the Chancellor may be about to close this loophole as it could prove extremely lucrative.
Aside from the impact that may have on saving for later life, there are a couple of things from the legal side to consider. Firstly, if you are still under the age of 75 and have a defined contribution pension scheme you might want to think about some IHT planning.
There’s other documentation you might want to think about, such as any Lasting Powers of Attorney, or your will, as your nominated beneficiary doesn’t automatically become entitled to manage your finances or access your pension if you become able to do so yourself.
Also, if you divorce and / or remarry later in life (you might want to read this first!) then there are other things to consider.
For example, if your previous spouse died and you get bereavement benefits, you’ll lose them when you move in together or remarry. If you’re divorced and get spousal maintenance, this usually stops when you remarry. Even if you just move in together, if you become better off, your ex-partner could ask to reduce or stop payments.
As well as the financial side of things, you might also want to revisit some of your paperwork. When you remarry it will void any existing will, so unless you make a new one, you’ll be treated as not having a will – so your children may not get what you want them to have.
It’s always a good idea to plan ahead and avoid paying more IHT than you need to.
If you need any help or advice, contact the Private Client team at Downs Solicitors to see how we can help.