One in four over 50s are planning to leave on average 56 per cent of their pension behind after they die, which in cash terms comes to around £51,000 on average.
Saga Investment Services commissioned Populus to survey 1,915 people, of which 865 were over 50 in June this year, with a defined contribution pension and who were currently using flexible drawdown.
Despite a desire to pass on their savings, it found confusion among over fifties surrounding who they could pass on their pension to and how it would be taxed.
Around one in five believed only their spouse could inherit the funds, while 42 per cent correctly stated the remaining pensions could be left to anyone they nominate, whilst the rest didn’t know who could inherit left over pension savings.
Understanding on the taxation of inherited pension wealth was low, with less than one in five correctly stating that potentially no tax would be due on inherited savings if the pension owner was under the age of 75 at death.
If the original pension owner died over the age of 75, Saga found similar results – less than one in five correctly believed that the tax paid would depend on the beneficiary’s income tax rate.
Only one in four people planning to pass on their pension had taken professional advice on the issue.
This comes as it has been revealed more than £6bn has been paid out from pension savings since the introduction of last year’s historic reforms, according to figures from HM Revenue and Customs.
Following the April 2015 reforms, new tax rules were applied to any remaining savings left in someone’s pension after they died.
For someone dying under the age 75, their heirs can now inherit their remaining pension tax free, and for someone dying over the age of 75, any inherited pension is taxed at the beneficiary’s personal income tax rate.
Gareth Shaw, head of consumer affairs at Saga Investment Services, said typically, pension savings are ringfenced from IHT and people could therefore inherit significant sums, either paying a lower amount of tax or no tax at all, depending on their income and the amount they inherit.
“However, there’s a balance to be had here – the desire to pass on money from a pension should not overpower the need to have financial comfort in retirement,” he noted. “With any inheritance tax planning, be it pensions or other assets, professional advice will be essential to help consumers get that balance right.”
Last month, a survey by Prudential found almost two thirds of advisers say their clients have changed their retirement plans to exploit the loosened death benefits rules as a result of pension freedoms.
ruth.gillbe@ft.com
