Pensions and Inheritance: How Your Pension Can Cut Your Inheritance Tax Bill

Recently, there has been a sharp increase in inheritance tax bills. In the UK, people paid £500m more in the first quarter of the 2021-22 tax year than the same period the previous year; in total they paid £2.1bn. However, there is a link between pensions and inheritance tax.

Pensions almost always fall outside your estate for inheritance tax purposes; they are not included in the calculation of whether your estate is worth more than £325,000.

The pension system also makes it simple to pass on unused pension savings to your heirs, particularly with defined-contribution or money-purchase plans. If you die before the age of 75, your heirs are entitled to all the money with no tax to pay; if you die after age 75, your heirs still get the cash, but will need to pay income tax on it at whatever rate they normally pay.

The rules for people in defined-benefit pension schemes, where you get a guaranteed income in retirement, are more restrictive. If you haven’t retired and die before age 75, your beneficiary will usually receive a tax-free lump sum. Ensure you tell your pension scheme who your beneficiary should be. If you have begun taking a pension, or you’re older than 75 when you die, your chosen heirs may receive a portion of your pension, typically with income tax to pay.

pensions and inheritance

Inheritance Tax

Inheritance tax (IHT) is payable at 40 percent on the value of an estate above a certain threshold of a person who has passed away. To avoid taxation as much as is legally possible, many people choose to take preventative action before they pass away. However, research from Barclays Wealth has shown many people are failing to understand how IHT works.

In England and Wales, if an Estate is worth more than £325,000 when a person dies, then they typically have to pay Inheritance Tax. Currently, the Inheritance Tax rate is 40% on anything above the threshold. If a person leaves more than 10% of the estate’s value to charity, then the rate may reduce to 36%.

If inheritance tax is payable

The grant of representation will not usually be issued until the inheritance tax (IHT) has been paid to HMRC. This can potentially cause a delay in the administration of the estate.

You usually have to pay 10% of the tax due on the value of property and shares plus all of the tax due in respect of the rest of the estate. This tax payment should be made within six months of death. The additional tax is payable in yearly instalments over a ten-year period, or as soon as they are sold. Interest will start to accrue on any outstanding inheritance tax after six months from the date of death.

How We Can Help with Pensions and Inheritance Tax

Here at The Inheritance Experts we work with solicitors who have years of experience in inheritance claims. This includes pensions and inheritance tax. Contact us today by filling in our contact form. Or call us on 01614138763 to speak to one of our friendly knowledgeable agents.

0161 413 8763

7 days a week from 8am - 9pm