Holding back pension wealth for the next generation

Holding back pension wealth for the next generationShould retirees with a range of investment assets be holding back pension wealth for the next generation?

The introduction of new pension freedom rules in April 2015 has created confusion for a lot of wealthy retirees about how tax rules affect unused pensions they pass on to the next generation.

According to new research by Saga Investment, over 50s are holding back savings in their pensions so they can pass it on to children or grandchildren tax-efficiently.

The research suggests that 1 in 4 over 50s plan to leave part of their unused pension pots to loved ones.

The average amount being passed on to beneficiaries is £51,000.

Under the new pension freedom rules, you can inherit unused pension savings free of tax, if the retiree dies before their 75th birthday.

For a retiree who dies after age 75, any unused pension which is passed on is taxed at the personal income tax rate of the beneficiary.

The research found that, in spite of their ambition to leave some pension savings to the next generation, there is still a lot of confusion about taxation and who retirees can leave their savings for.

42% knew that their savings could go to those they nominate, whilst, 22% thought only their spouse could inherit it. The rest had no idea.

There was also a poor level of knowledge about the taxation of inherited pension wealth.

Only 18% of people knew that there might not be any tax due on inherited savings if the owner passed away under the age of 75.

And only 19% knew that the tax paid would depend on the beneficiary’s income tax rate if the owner was aged over 75.

According to Gareth Shaw, Head of Consumer Affairs at Saga Investment Services:

“Thanks to the changes made in April last year, pensions have become a far more attractive way to pass on your wealth and bypass Inheritance Tax (IHT).

“Typically, pension savings are ringfenced from IHT, and therefore people could inherit significant sums either paying a lower amount of tax or no tax at all, depending on their income and the amount they inherit.

“If anyone is thinking of passing on their pension, it’s important that they complete an ‘expression of wish’ form with their pension provider and nominate who they want their pension to go to.

“However, there’s a balance to be had here – the desire to pass on money from a pension should not overpower the need to have financial comfort in retirement.

“With any inheritance tax planning, be it pensions or other assets, professional advice will be essential to help consumers get that balance right.”

Are you holding back pension wealth for the next generation and do you understand the rules that govern how this will work?


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