The new pension rules have made it possible to leave your fund to any beneficiary, including a child, without paying a 55% ‘death tax’.

Many people want to leave their assets to their family when they pass, and a pension is now a tax-efficient way to do this. They are not considered part of a person’s estate so are exempt from inheritance tax but, prior to the recent changes, a death tax of up to 55% was applied instead. Now that the death tax has been abolished pensions could be considered particularly effective vehicles for leaving some money to beneficiaries. Note that tax treatment depends on your individual circumstances and may be subject to change. The new tax rules are:

• If you die before the age of 75 your beneficiaries will inherit your fund completely tax-free.
• If you die after the age of 75 the recipient will pay income tax on any withdrawals they make. Also, until April 2016, a 45% tax charge will apply if they remove the entire fund.

The scenario below shows how a fund of £375,000 can be passed down in a tax-friendly way. Our Pension Family Tree is illustrative purposes only:

Another new change is the flexibility to leave your fund to whoever you wish.  Prior to the reforms you could only leave it to someone who was financially dependent on you, such as a child or spouse, but now you can choose anyone to be a beneficiary.

How can you ensure that your children will receive your pension?

• Give contact details of your beneficiaries to your provider; your pension does not form part of your will so it is essential that you remember to do this
• Be sure that the way in which you take your pension allows you to pass it on to your loved ones. In broad terms the new rules apply for those who have kept their money invested or are in income drawdown. With an annuity, you can nominate a beneficiary and pass on the income as long as it is on a joint life basis or if it has a guarantee period.
• Check how well your fund is performing to see whether you’ll have enough left over to pass on. Also take into account how much you are likely to need to live on when you retire, bearing in mind that we are all likely to be living longer in the future, which, in turn, will put more pressure on your pension pot.

The world of pensions can be complex enough when just considering what is best for yourself - let alone your family. A financial adviser can help you review your pension’s performance; features which may or may not affect its accessibility to your loved ones; and the most appropriate options open to you when it comes to take your pot. If you wish to consider pension transfer (pension switch) they will also walk you through your options.

At Portafina we offer advice with no obligation. Regulated by the Financial Conduct Authority (FCA), we will place your needs and aspirations for both you and your family at the heart of our assessment. Not only can we help guide you with passing your pension on, but we can also assess how your pension is performing so you can hopefully maximise your savings.

Claim your free guide to personal pensions

For a closer look at different types of pension and the benefits they offer download Your guide to personal pensions. This simple overview looks at some of the basic features, as well as considering what flexibility various schemes may have when you die. It also covers how pension transfer works (pension switch) and how this may help you attain your own unique goals in retirement.

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