Family Fortunes and The Generation Game are not just light-hearted TV game shows but a necessary part of estate planning with changes to inheritance tax rules.
A key part of the game and one that is often overlooked as part of last year’s shake up of ways to access pension cash is the way pension death benefits are taxed.
This may sound gruesome, but when a family joins together and plays the game out, the tax advantages can be significant.
So how do pension tax benefits work?
The way to handle this is to look at what the rules allow and then work out how to apply them to your family to minimise any tax paid.
Pension death benefit rules
The rule has two parts, depending on age:
- If someone dies before they are 75 years old and leaves an unspent pension, the money in the pension can be withdrawn as a tax-free lump sum or income
- If someone dies after they are 75 years old and leaves an unspent pension, the same options are available to the beneficiaries but they have to pay income tax on the windfall
The important part of the rules allows the beneficiary receiving the unspent pension to pass to any remaining unspent fund to their successors.
However, the relevant age is tested against whether each deceased successor is older or younger than 75 years old when they die.
How the game works
The rules sound complicated but work like this – John dies aged 72 and leaves his unspent pension to Melissa. She pays no tax on the inheritance.
Melissa does not spend all the cash before she dies aged 74 and leaves the balance to Hugh.
Hugh pays no tax either. He still has some of the money left when he dies, aged 68. His successor, Freya, inherits paying no tax and spends the remaining funds.
Leaving an unspent pension presents an excellent inheritance tax planning opportunity for a family.
The strategy works for an expat leaving a QROPS fund to successors who live in the UK.
Points to watch include the transfers must take place within two years of the death and the beneficiaries must be dependants unless the deceased has none, in which case, any individual can inherit.
