Planning to pass on money to children is often a priority for retirement savers – but what’s the best way to do this?
Many savers have cash locked away in their pensions that they will not draw down before they die.
Pension freedoms mean money in the fund is probably the last many should spend if they have income from other sources, such as investments.
The law says your finances and money in a pension are separate and are tax-treated differently on your death.
This means any assets held in the pension fund are not part of your estate when inheritance tax is worked out.
Clear intentions
For wealthy pensioners, this is why not touching your pot makes sense if you have plenty of other income.
But you must make your intentions clear by naming your children as beneficiaries with your pension provider, especially if they are 18 or over and no longer dependents.
If you don’t, they can still benefit from the cash in your fund, but the tax man will consider the money an income lump-sum that is taxable. If the fund is significant, this could mean they will stay pay income tax at 40% or 45%, which is the same rate as inheritance tax is charged.
The tax issue also comes into play depending on your age at death.
Your 75thbirthday is the key date.
The age trap
If you die before you are 75, the money is free of tax providing your children take all the cash within two years of your passing.
If you die after your 75thbirthday, they still get the money but will pay income tax when they withdraw the cash.
For expats with a QROPS offshore pension, the same inheritance tax rules apply if your children liver in the UK. If they live overseas, the tax rules of the country where they have their home will apply.
When you are making your financial plans, do not forget that your children will not benefit from the 25% tax-free lump sum if they inherit your pension savings.
This could make drawing that tax-free amount in your retirement and gifting them the sum more sensible.
