How keeping the pension for last could save IHT

“It’s hard to argue that the death benefit rules are aligned with a wider pension system whose purpose is to provide adequate incomes in retirement, rather than estate planning opportunities for the rich.”

For savers looking to capitalise on the tax efficiency of passing on a DC pension, My Pension Expert’s Megson suggests checking if the scheme enables such bequests.

“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.”

Most clients automatically want to pass their pension to their husband or wife, but this is often not the most tax-efficient strategy.Fiona Tait, Intelligent Pensions

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.