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How keeping the pension for last could save IHT

This article is part of
Guide to passing on wealth after you die

“Some schemes might be slightly old fashioned and might not allow the pot to be inherited as a drawdown account. In which case, individuals should check with their existing provider to confirm.

“In some cases, it could be worth upgrading the current scheme or switching providers. Of course, independent financial advice is always advisable before making any decision, as switching could mean the pension holder might lose out on other benefits.”

But if a pension transfer to a discretionary scheme leads to any improvement in death benefits and the member is in severe ill-health, Scottish Widows’ Lewis warns HMRC can treat them as having made a lifetime transfer with regards to IHT if they die within two years.

She says: “Depending on all the circumstances, it may be worth providing a binding direction in favour of the member’s spouse or civil partner with the transfer request. This puts the death benefits into the member’s IHT estate but takes advantage of the IHT inter-spouse exemption.”

The importance of expressing wishes

Although it should not be overlooked, it is important to remember that it is not enough to state the beneficiaries of a pension in a will, says Megson.

“All beneficiaries must be registered with one’s pension provider as well. So if someone’s relationship status changes, the pension provider must be updated as soon as possible. Doing so prevents any complications or unnecessary charges being applied.”

Intelligent Pensions technical director Fiona Tait likewise highlights the importance of clients ensuring they have informed trustees who they wish to receive their benefits.

“In the vast majority of cases, trustees will try to follow their member’s wishes. Complications normally occur if there are family members who feel unfairly excluded, and/or if the member has failed to keep their nomination beneficiaries up to date.”

Tait also recommends making the nomination as clear as possible and providing trustees with extra detail if there are complicated family circumstances. “This information is not binding on the trustees, but it allows them to make their decision based on the full facts, which is helpful to them if the decision is challenged by another interested party.

“A clear nomination also allows the benefits to be paid out relatively quickly, which is extremely helpful if other assets are tied up in probate.”

Clients should also be advised to carefully consider who should receive the benefits, says Tait. “Most clients automatically want to pass their pension to their husband or wife, but this is often not the most tax-efficient strategy.