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The pension family tree

Tuesday, 09 June 2015 08:00

As of April this year, private pension wealth can be passed on to other family members, in some cases completely tax-free. This is a big opportunity for those looking to make investments for the next generation, as it opens up the concept of the pension family tree. Children or grandchildren can inherit your pension, and should you die before the age of 75 they will not pay tax on withdrawals they make from it.

Under the previous pension rules, once you had started to draw your pension, either by an annuity or income drawdown, in most cases anything paid out to your surviving beneficiaries was subject to income tax if taken as income, or a 55% flat-rate tax if taken as a lump sum. In the case of income, this could only be paid to someone financially dependent on you, like your spouse or a dependent child.

Under the new rules as of April 6th, regardless of whether you have started to draw a pension, your remaining fund can be passed on tax-free, if you die before the age of 75.

Your nominated beneficiary can use it to provide a tax-free income or a tax-free lump sum and does not need to be financially dependent on you. If you die on or after the age of 75, the beneficiary can receive the pension, but it is subject to tax at their highest marginal rate if taken as income. Pensions generally fall outside an estate, and thus are free of inheritance tax.

The Chancellor has made it possible to pass pension wealth on in a more taxefficient manner. That said tax rules can change in future and tax treatment will depend on your individual circumstances.

It is considered that the average life expectancy at the age of 65 in the UK is 86 for men and 89 for women, so the Government estimates most people will survive the age 75 threshold, and thus bring in tax receipts when they die. Pensions are governed by the lifetime allowance, which is currently set at £1.25m: anything over this is subject to a tax charge of up to 55%.

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Your pension family tree

Husband dies age 74 with £500,000 in his SIPP

£500,000 passes tax free to wife

Wife inherits the pension. Withdrawals are tax free as husband died under age 75. Leaves £400,000 to pass on when she dies age 85.

£400,000 passes tax free to their two children

Two children inherit half each, which they both keep with a SIPP, so there is no tax to pay on the investment growth. Withdrawals are subject to income tax. Both children die after age 75.

Remainder passes tax free to grandchildren

Grandchildren inherit the pension with the same options as their parents. Withdrawals are subject to income tax.

How to structure and set up a pension family tree

You simply nominate who you would like the remaining pension paid to when you die (you can nominate more than one person) and you can change the nomination at any time. The nomination also applies to income drawdown, an option where you draw retirement income directly from the SIPP, but it does not apply to an annuity. The nomination is not legally binding, but it is seen as your wishes. Nominated beneficiaries and dependants can choose whether they take an income or lump sum.

This article is based on our understanding of current and draft legislation, which could change in future.

For advice contact me on 01896 757734 or email This email address is being protected from spambots. You need JavaScript enabled to view it. - Fraser Brydon - Money Matters