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Murray Beith Murray is a leading Scottish private client law firm.

For over 170 years we have specialised in meeting the legal, financial and administrative needs of individuals and families, family trusts, charities and private companies.

Call us today on 0131 225 1200
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3 minutes reading time (598 words)

Intergenerational estate planning using pensions

peterPensions can be an incredibly efficient way of maximising the inheritance your loved ones will receive after you pass away, greatly mitigating your inheritance tax liability and providing an element of flexibility for intergenerational estate planning. In this article, we look at some of the key benefits of using pensions as part of the estate planning process

Benefits of pensions in the estate planning process

Tax benefits

You can make contributions to pensions without Inheritance Tax (IHT) consequences - so long as you are not in serious ill health when you make the contributions. When you add to a pension, you take funds out of the estate, but it is not deemed to be a transfer of value for IHT purposes. There are, of course, certain restrictions, but generally, you can put up to £40,000 each year into pension savings from the estate. Once funds have been paid into a pension scheme, no IHT is charged on the growth that funds benefit from. 

The distribution of pension funds to a beneficiary does not trigger an IHT charge. There is also no IHT charge when funds are moved into beneficiary drawdown and where the deceased’s available lifetime allowance was not exceeded, no lifetime allowance charge.

What about income tax? 

You may be concerned that beneficiaries will need to pay income tax on a lump sum death benefit or withdrawals from beneficiary drawdown. However, since 6th April 2015, the rules have changed. If the pension holder passed away before they reach the age of 75, death benefits are paid tax-free, so long as they are paid out of drawdown set up within two years of death. If the pension holder dies aged 75 or older, income tax applies. 

Nomination and ‘successors’

Personal pensions can be passed down through generations without leaving the pension environment. Beneficiary drawdown can be set up not only for direct dependants but for anyone who was dependant or specifically nominated as a beneficiary.

Similarly, a ‘successor’ may be nominated by a pension beneficiary to receive drawdown after they pass away. This means that death benefits can be passed from one beneficiary to another within beneficiary drawdown, remaining outside of their estates and without incurring IHT charges. 

What are the limitations and drawbacks of using pensions as part of intergenerational estate planning? 

Firstly, it is important to note that not everyone will benefit from the ability to contribute £40,000 each year - for some, it may be as low as £4,000 in certain circumstances. 

Also, where the pension experiences investment shortfall and existing retirement funds are affected, additional funds that had been part of IHT planning may be required to make up the shortfall. 

Finally, many people may take issue with the nomination approach, which is non-binding. It means that the final decision as to who receives death benefits often could be left up to trustees.

This area of law is particularly complicated and will depend on your specific circumstances. Our experienced specialists can advise you. 

Specialist Estate Planning Lawyers, Edinburgh

Murray Beith Murray Partner, Peter Shand, is head of the Asset Protection group and is a specialist in succession and estate planning. If you would like to discuss any of the issues covered in this article, or if you require assistance with any other matter, please complete our contact form or call us on 0131 225 1200.

Murray Beith Murray was established in 1849, as advisors for generations of clients, committed to our values of integrity, expertise and trust. This aim and these values continue to this day, as does our commitment to be here when you need us.

Maximising your inheritance tax threshold
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