Personal Pension Plans, including SIPPS, and Income Drawdown plans are quite a unique proposition. A Personal Pension and Drawdown is written under a Trust and so is free from IHT. This makes it a very efficient investment. If IHT is an issue, it may be more sensible to draw income from assets that are liable to IHT and to leave the Personal Pension to grow, free of IHT. Additionally, the rules concerning receiving death benefits from a Personal Pension or Drawdown changed radically in 2015.
If you die before age 75, the fund value can be paid to anybody, free of all income tax. This includes a dependent such as your spouse, or your children, grandchildren, nieces, nephews, other family members or even that nice lady who lives next door. After age 75, the fund can still be paid to anybody, but the amount of money received by the beneficiary is deemed as income and will be taxed accordingly.
To avoid a large income tax payment, this money can be paid into a Nominee Drawdown plan so that income can be drawn more efficiently. There are further rules involved which we won’t cover in detail here, but broadly, your Personal Pension or Drawdown plan can be paid to anybody upon your death. What’s also key is that a Personal Pension and Drawdown is written under a Trust and so is free from Inheritance Tax (IHT). This makes it a very efficient investment. If IHT is an issue, it may be more sensible to draw income from assets that are liable to IHT and to leave the Personal Pension to grow, free of IHT. Clearly, in these circumstances, advice must be taken.
A new allowance (called Residence Nil Rate Band or RNRB) was introduced on a tapered basis in 2017 (and will increase inline with the Consumer Price Index for 2021) the bands apply as follows:
£100,000 in 2017 to 2018 £125,000 in 2018 to 2019 £150,000 in 2019 to 2020 £175,000 in 2020 to 2021 If a person leaves a family home to a direct descendant, they will benefit from the RNRB as well as the ordinary nil rate band - which all sounds simple until you start asking further questions. You then find out that they must leave the property to a child or remoter descendant, or alternatively to an adopted child, a stepchild or foster child or any of their offspring. Then, there are implications for those people who have downsized or sold their property and also for those with properties in excess of £2M, who will see the allowance tapered. As can be seen, it’s not quite as simple as it seems and, in all instances, advice is crucial.
A guaranteed income, normally purchased with Personal Pension money. The death benefits are dependent on how the annuity is set up, but most importantly, there is no scope to pay any benefits down to further generations upon the death of the individual or the spouse.
Depending on when you reached or will reach your State Pension age, when you die, some of your State Pension entitlements may pass to your widow, widower or surviving civil partner. If you die, your spouse or civil partner may also be able to claim bereavement benefits.
A new State Pension system was introduced in April 2016 and the death benefits are typically now dependent on when the deceased drew their benefits. Death benefits also depends on the National Insurance history of the widowed husband or wife. There will be transitional arrangements, so that in some circumstances, people who have made National Insurance contributions or have credits under the current system will still be able to inherit a state pension from a late spouse or partner. Each case has to be treated on the circumstances of the individual. However, it should be noted that in terms of passing money down through generations, there is no scope for this. Once you and your spouse die, the your State Pension will die with you.
Importantly, it should be noted that in terms of passing money down through generations, the State Pension has no scope for this. Once you and your spouse die, it will die with you.
Note also that as there is no value on death, no element of the State Pension is considered for IHT purposes.
These are guaranteed benefits that are paid as income, normally provided by large companies or the State (such as to NHS staff or teachers). The income normally has some element of inflation protection and upon death, a percentage of the income is normally paid to the spouse. The is most often 50% but can be as high as two thirds.
However, if there is no (surviving) spouse, the benefits will cease upon the death of the member and there is no scope for passing any money down to future generations. As there is no value on death, no element of a Defined Benefit Pension is considered for IHT purposes.
Slightly different to most other assets in that they grow free of all tax and the income they generate is also tax free. On death, an ISA can be passed to a spouse and they maintain this tax-free element.
However, whilst any payments made to a spouse are free of IHT, an ISA itself will form part of an estate for IHT purposes, so whilst it can be passed down to further generations, doing so will both lose its ISA status and make it liable to IHT.