A will gives you control. Typically, it spells out who will serve as the executor as well as who will receive assets belonging to the decedent and under what terms.
It is a common misconception that even if there is no will everything goes directly to your spouse, but this is not the case. Depending on the value of assets in the estate a spouse may only be entitled to a proportion of this.
If you die without a will, you’re considered intestate and inevitably leaving your finances to chance. So, why put it off?
People often underestimate the value of their assets thinking they don’t have that much to distribute and, ultimately, people don’t like to think about their own death.
These changes provide a very useful tax planning opportunity and there is no limit to the number of generations these funds can be passed downIt’s a lot to leave up to the law, and with this in mind, it is crucial that the lengthy process is understood.
Not only this, but there are further finances that should be planned and put in place, determining the future of your family’s fortune, one of which is your pension and its benefits.
Pension death benefits
A key part of the Freedom and Choice in pensions reforms were significant changes in the taxation of pension death benefits. The new rules are far more generous than many thought would be the case, and are crucial for individuals to understand.
Under the new rules if someone dies with a pension before they are 75 then the remaining fund may be taken tax free as either a lump sum or income by their beneficiaries, with benefits tested against the lifetime allowance.
If death occurs after the age of 75 then the same options apply, only this time the beneficiaries’ tax rate will be applied to either the lump sum taken or the income.
Passing money through the generations
The new rules allow the beneficiary to again pass on any of these funds, in event of their death, to their own nominated beneficiary with the same tax treatment depending on whether the beneficiary of the original pension dies before or after reaching the age of 75.
This gives the potential to pass pension funds down the generations without ever falling into anyone’s estate for inheritance tax purposes.
In addition to this benefit, continuing to hold the funds in a pension ensure they are in a tax advantaged environment.
| Example: |
Colin dies age 65 with a pension fund of £200,000 which he leaves as a nominated beneficiary to his wife Maureen aged 60. Maureen decides to keep the funds within a pension environment and draw a tax free income (as Colin died before age 75) of £12,000 per year. Maureen passes away age 74 and the remaining fund at that point is £160,000, Maureen had nominated her daughter Emma who is 48. Emma again keeps the funds in a pension environment to boost her income (which again will be tax free as Maureen died before 75) and retire early when she reaches 55. Emma makes two nominations to her pension fund for her two daughters. It is important to note that to gain any tax advantage, any transfer of funds to beneficiaries need to take place within two years of the pension holder’s death. It is also possible to skip generations for grandparent gifts and this again can be useful planning. |
Conclusion
These changes provide a very useful tax planning opportunity and there is no limit to the number of generations these funds can be passed down, but careful planning is needed to ensure correct nominations are in place and that these are reviewed regularly.
The same should be implemented when planning and writing your will, leaving none of your finances to chance.
Finally a word of caution. Some older pension plans are unable to give the full flexibility that is now available and therefore it is vital that this is checked out and advice sought.
Mike McAnulty is director at Central Investment
