These three aspects combine together resulting in IHT benefits that are hard to match: pension contributions should have no IHT consequences; the funds held within beneficiary drawdown are outside of the IHT estate; there is no tax to pay on drawdown death benefits paid following death before age 75 and just marginal rate tax for later deaths.
Couple this with the ability to use beneficiary drawdown to pass wealth down through the generations by nominating any beneficiary and successor beneficiaries to receive drawdown after the member or previous beneficiary’s death, and you’re left with a straightforward, tax-efficient solution to avoiding IHT on substantial amounts of capital for an indefinite period of time.
There’s rarely a free lunch, so there are some drawbacks to point out. Firstly, the amount that can be contributed to a pension each year is limited by the annual allowance – as low as £10,000 or £4,000 for those who’ve started taking flexible income – preventing large sums being accumulated at once. Second, IHT planning is a secondary benefit of pensions behind retirement planning for those who can afford to use their pensions more flexibly. And finally, the non-binding nomination approach which leaves the final decision over the recipient of death benefits to the scheme trustees may not sit well with everyone.
Those that are comfortable with the trustees’ discretion over death benefits and have some scope to use a pension for IHT planning, however, will appreciate its simplicity and flexibility. All that is required is to set up a personal pension and keep the nomination of beneficiary up to date. For those with little or no need for their pension income, this may be an appealing approach when compared to the complexity of setting up a trust, completing deeds to amend and appoint trustees, the complex taxation position of many trusts and the often high legal fees.
Take a look at Scottish Widows insight and guidance here.