How can a transfer help me pass my pension to my beneficiaries?

I like the idea of being able to leave my unspent pension to my son and two daughters and my five grandchildren but I’m not sure what I need to do. How does this work in practice?

Question asked by Felix Beacham
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Answered by Neil Adams

Your pension: your biggest asset and your loved ones

The new pension freedoms that came into force in April of 2015 introduced a number of important new ways for savers to access their money purchase pension savings. Importantly, the new rules also abolished the previous 55% ‘death tax’ that attached to pension savings.

Current pension freedom rules

Under the new regime, pension assets can now be passed to your beneficiaries free of inheritance tax and, for those who die before age 75, free of any income tax liability for the recipients. This is a major boon for those who have saved carefully over their working lives and want to be able to leave their pension wealth to their loved ones.

Under the current rules, assuming you die before age 75, all your pension assets can be passed to your beneficiaries free of tax.

Your beneficiaries can choose to continue drawdown – a process called nominee drawdown – and enjoy the income tax free or they can purchase an annuity, the income from which will also be free of tax. If you die after age 75, your beneficiaries will be liable to income tax at their marginal rate on anything you might leave them.

This will include tax on any income they might receive if they choose to continue with drawdown or on the income from any annuity they might purchase with the funds you pass to them. This is still a significant improvement on the previous rules.

What about a final salary pension?

The problem is that, in the case of final salary scheme arrangements, when you and your spouse die, the pension dies with you – regardless of how long you may have been receiving the benefits.

This means that a transfer from a final salary to a money purchase scheme enables you to take advantage of the new pension freedoms and to create a pension ‘pot’ that can not only provide you with a source of income in retirement but which can also be passed to your beneficiaries.

Even so, it’s important to appreciate what you’ll be giving up in return so you’ll need to seek professional advice to work out whether a pension transfer is right for you.

final salary transfers
pensions and inheritance
money purchase transfers
abolition of death tax
pension freedoms and transfers
This information does not constitute financial or other professional advice. You should consult your professional adviser or contact us directly on 02084327333 should you require financial advice. It is important to ensure any insurance policy you take out is suitable for your needs.
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