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Pension as part of estate

Hi 

Does a pension form part of a person's estate? If not, does it make sense to put more into a pension to try and bring the overall estate under the £325k threshold?  

Comments

  • In most cases it doesn’t and building up a pension pot can be a way of reducing IHT, but it does tie your money up long term if you are a long way from retirement, and beneficiaries of inherited pensions are subject to other taxation if you don’t die before you reach your 75th birthday.

    What is your marital status and do you have any children? £325k would suggest you are single with no children, but if that is not correct your total exemptions could be up to £500k and double that for married couples or those in civil partnerships.
  • NannaH
    NannaH Posts: 570 Forumite
    500 Posts First Anniversary Name Dropper
    You can only contribute up to age 75 too,  and only as much as the limits allow.
    Bear in mind that if someone inherits a pension of a 75 + year old,   They pay tax on it at their  own rate,  so could end up paying 40% tax anyway. 
    There is also talk of them taxing Everyone who inherits a pension, whatever the deceased age whereas now for under 75 deaths,   the whole lot is completely tax free. 
  • My thinking is that I could put the money into a pension, not take any out, and then when I die (I'm a way off 75 at the moment) the beneficiary would inherit a lump sum pension pot which would not count towards my estate. Or am I being too optimistic here?   
  • NannaH
    NannaH Posts: 570 Forumite
    500 Posts First Anniversary Name Dropper
    As it stands, Pensions are outside your estate so rest assured.
    Just make sure you have a beneficiary listed.
  • My thinking is that I could put the money into a pension, not take any out, and then when I die (I'm a way off 75 at the moment) the beneficiary would inherit a lump sum pension pot which would not count towards my estate. Or am I being too optimistic here?   
    Under the current rules yes, but it is quite possible a future government might close this loophole and the plan will fail. Also if you don’t die prematurely you beneficiaries will pay income tax on any withdrawals at their nominal rate so it is not a tax free option.

    Personally I prefer lifetime gifting to shifting net worth into a pension I won’t touch.
  • NannaH
    NannaH Posts: 570 Forumite
    500 Posts First Anniversary Name Dropper
    Another thing to consider,  if you were unlucky enough to need a care home for a long time in later years and burned through the value of your house/ other investments,   drawing down huge amounts from your pension would see it taxed at 40% at least,  given you could be paying £5k a month in fees,  the only way around that would be to buy a care needs annuity. 
    My neighbour lasted 8 years costing £400k in a Dementia home. 
  • Thanks for tge advice everybody. Always difficult to make truly free decisions while keeping an eye on the tax impact.

    The 75 age limit - is that likely to rise to 77  when the pension age goes up to 57? 
  • Marcon
    Marcon Posts: 13,026 Forumite
    Eighth Anniversary 10,000 Posts Name Dropper Combo Breaker
    Thanks for tge advice everybody. Always difficult to make truly free decisions while keeping an eye on the tax impact.

    The 75 age limit - is that likely to rise to 77  when the pension age goes up to 57? 
    No suggestion that will happen.

    Be aware that the crucial thing about your pension isn't whether or not it forms part of your estate, but whether or not it falls within the estate for the purposes of IHT. Provided anything paid to your estate is done so at the discretion of the trustees/managers, then it is (under current legislation) still not subject to IHT. It is the discretionary nature of the payment, rather than the destination for the funds, which keeps it outside IHT.
    Googling on your question might have been both quicker and easier, if you're only after simple facts rather than opinions!  
  • NannaH
    NannaH Posts: 570 Forumite
    500 Posts First Anniversary Name Dropper
    If that’s the case,  why is it advised that life insurance be written in trust?
    I thought that payouts,  especially death in service payouts, are also discretionary?  

    Is there a different law for retail bought life ins regarding Estates?  

  • Marcon
    Marcon Posts: 13,026 Forumite
    Eighth Anniversary 10,000 Posts Name Dropper Combo Breaker
    NannaH said:
    If that’s the case,  why is it advised that life insurance be written in trust?
    I thought that payouts,  especially death in service payouts, are also discretionary?  

    Is there a different law for retail bought life ins regarding Estates?  

    Life insurance isn't a pension.

    For tax reasons, DIS payments are indeed almost always discretionary.

    Yes, legislation differs according to the type of product.
    Googling on your question might have been both quicker and easier, if you're only after simple facts rather than opinions!  
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