During the budget, chancellor Jeremy Hunt scrapped the Lifetime Allowance in a bid to get Britons working longer. This change means pension savers could leave vast sums of money to their loved ones completely free of inheritance tax (IHT).
The Lifetime Allowance is set by the Government and limits the total amount people can build up in pension benefits over their lifetime while still enjoying the full tax benefits.
Dean Butler, managing director for customer at Standard Life, said the Budget had “super-charged the attractiveness of defined contribution (DC) pensions from an inheritance and inter-generational wealth perspective”.
Chris Etherington, tax partner at the consultancy RSM UK, added that with no lifetime limit restricting how much can be saved into pension pots, “the big winners” are those looking to reduce their inheritance tax exposure.
What happens to a pension after death?
When an individual dies, their spouse, civil partner or beneficiaries may be able to access their pension.
The rules for pension death benefits will vary depending on the type of pension they have and their age when they pass away.
READ MORE: State pension warning as age changes may affect free bus pass and free prescriptions
The main pension rule governing defined contribution pensions in death is the age when someone dies and whether they’ve already started drawing their pension.
If someone dies before their 75th birthday and they haven’t started drawing their pension, it can be passed to their beneficiaries tax-free.
In this scenario, private pension payments after death can be taken as a lump sum, invested in drawdown or used to purchase an annuity. Their beneficiaries have two years to claim a death pension, after which point tax may be charged.
If someone dies before their 75th birthday, but they have already started drawing their pension, the way they have chosen to access their savings will determine the action their beneficiaries can take.
If someone has withdrawn a lump sum and they have remaining cash in their bank account outside their pension, this will be counted as part of their estate, but if they’ve opted for drawdown, their beneficiaries can access whatever’s left in their pension entirely tax-free. This can be via drawdown payments, a lump sum or buying an annuity.
Don’t miss…
Switching from oven to air fryer could save 75% on energy bills [INSIGHT]
Yorkshire Building Society increases interest rates for savers [LATEST]
Households can get £159 TV licence refund if they meet criteria [ANALYSIS]
If an individual dies before they retire their pension will pay out a lump sum worth two to four times their salary.
If they’re younger than 75 when they die, this payment will be tax-free for their beneficiaries. Defined benefit pensions also usually pay what’s called a ‘survivor’s pension’ to either a spouse, civil partner or dependent child, but this will be taxed at their marginal rate of income tax.
If someone has already retired when they die a defined benefit pension will usually continue paying a reduced pension to their spouse, civil partner or other dependent.
The scheme rules will define who is classed as a dependant and are usually much stricter on who may receive a death benefits payment compared to a personal pension.
It may be possible in certain instance to pass on one’s state pension payments after death but this can only go to their spouse or civil partner.
One of the main mechanisms preventing wealthy savers from putting significant amounts of money into their pensions to avoid IHT was the lifetime allowance.
This is the total amount that savers can accumulate in all their pensions (including final salary schemes, but excluding the state pension) before being hit with a tax charge of up to 55 percent.
The allowance is currently £1,073,100, but will be scrapped next month.
Abolishing the lifetime allowance means savers can potentially pass on unlimited sums to the next generation free of inheritance tax.
Mr Etherington noted “financial planners may be rubbing their hands with glee at the prospect of maximising pension pots to limit a family’s IHT exposure”.
While the lifetime allowance will not longer apply, savers must still pay attention to the annual allowance, which limits the amount of money that can be paid into pension pots each tax year and benefit from full tax relief.
The allowance is currently £40,000, but the chancellor is increasing it to £60,000 from April 6.
Savers can carry forward £40,000 from each of the three previous tax years (assuming you haven’t paid into a pension in those years), meaning they’ll be able to add a maximum of £180,000 in the 2023-24 tax year.
The money purchase annual allowance (MPAA) will rise from £4,000 to £10,000 next month.
The MPAA applies to anyone who has already taken money out of their pension.
For all the latest Business News Click Here
For the latest news and updates, follow us on Google News.
