How to pass on your pensions and minimise tax on your estate after you die

4th February 2022

Including your children and grandchildren in retirement planning can help the whole family.

The quick read:

  • It’s possible to pass pensions onto children or grandchildren tax efficiently.
  • Financial advisers can decode complex rules around pensions and inheritance to minimise tax on your estate.
  • Don’t leave inheritance considerations until old age – it’s vital to think about them as part of planning for retirement.

If you have children or grandchildren and hope to leave them something after you’re gone, it’s vital to factor them into your retirement planning.

That’s because pensions and ISA savings can be handed down to the next generation – just like the family home or investment properties. So, when doing the sums and preparing for your own retirement, it’s good to think holistically about the whole family’s finances and how your pension savings might benefit loved ones when you die.

When retirement planning meets inheritance

Many people think that inheritance matters are something to ponder around the time of writing their Will*, and then they can be promptly forgotten about. It’s true that having a well-drawn-up Will – one that’s kept updated as your circumstances change – is fundamental to ensuring your beneficiaries are looked after.

But rather than building up your assets and then deciding which family member gets what in your Will, it’s better to start out with imagining what kind of assets you would like to set aside for each of your loved ones, and then creating a financial plan to achieve this.

This subtle twist in thinking, from looking in the rear-view mirror to focusing on the road ahead, can be powerful when it comes to creating your family’s financial future.

Passing on pensions to your family

Many people have been diligent savers and have accumulated surplus pension savings alongside other retirement assets. These could be hugely valuable assets to pass onto the younger generation.

Seeking help from a financial adviser well in advance of your retirement is essential for helping you assess what you have saved, what you will realistically need and what can be earmarked for your loved ones after you die.

Defined Contribution pensions normally fall outside a person’s estate, so they’re not taken into account when Inheritance Tax is calculated.

What’s more, a pension doesn’t have to be earmarked for children or even relatives; you can leave it to anyone. It’s becoming more common to skip a generation and leave pensions to grandchildren – in this way, they can become almost like a family trust.

Bear in mind that a person’s entitlement to the state pension cannot be passed on. Similarly, Final Salary or Defined Benefit pensions often pay out to a spouse if the member (you) dies.

These pensions can sometimes be converted into a pot of money held in a Defined Contribution scheme, which can be passed onto an heir. If you want to do this, it’s mandatory to take advice via a financial adviser if the pension transfer value would be worth more than £30,000.

The finer details around passing on your Defined Contribution pensions depend on the type of scheme, the age you die and whether you’ve accessed the money, so it’s vital that you work with a financial adviser before making any decisions. Otherwise, your best-laid plans may become a headache for your loved ones.

Key points to consider:

  • The recipient is handed the pension as a pension, so there could be tax implications if withdrawing any money before they reach retirement age
  • Usually, the recipient can choose whether to take lump sums or an income from the pot
  • If you die before the age of 75, the recipient will not pay tax on lump sums from the pot
  • If you die after the age of 75, the recipient will pay income tax on most withdrawals

The government’s website has more details here.

Take advice

Factoring inheritance matters into your retirement planning can change how you save. For example, if you have an adult daughter with young children who works part-time, she may appreciate a boost to her pension.

As another example, you might want to contribute to a pension for your grandchildren. Even though most children do not pay tax, a parent or guardian can still open a pension in their name and add top-ups which are eligible for tax relief.

Giving the under-18s a head start in their retirement planning may seem premature, especially since this generation potentially have university tuition fees and high property prices to contend with.

But the pension provision that they will be offered through the workplace will be less generous than it was compared with previous generations and retirement will be very different in decades to come.

Financial advisers can help you think about your finances holistically, taking account of your whole family’s needs and planning tax efficiently for the future.

If you would like to talk about retirement and inheritance matters, however small or large, speak to a St. James’s Place Partner now.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

*Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills, along with Trusts are not regulated by the Financial Conduct Authority.