Inheritance Tax - Pension?

CSL0183

Hello,

Apologies for what may be a really silly question as I know next to nothing about inheritance tax other than apparently only the wealthy pay it so I’ve had my head buried in the sand and never gave it too much attention as didn’t think I would ever fall foul of this. 

Details -

40yr old man earning a pensionable salary of £80k in a DC scheme with a current pension pot value of approx £250k. I also have a small DB pension that is worth about £5k pa index linked. 

As part of the pension policy I have a death in service life assurance policy of 5x pensionable salary payable.

I’m in a longterm relationship (17yrs) but never felt the need or want to marry and have a house worth approx £500k but with a large £300k mortgage outstanding. (No mortgage insurance)

I have 5 children and no will other than on my pension beneficiary form that everything is left to my partner who would then dish it out between the 5 kids as she sees fit. 

If I was hit by a bus tomorrow, what would happen to my estate per se? 

I’m guessing…

£250k currently in pension pot
£400k (5 x £80k life assurance)
£100k (Guess of what my DB scheme may be worth?) 
£100k worth of equity in home (£200k / 2)

There’s potentially £850k there but not sure if it’s all applicable or if any of it is applicable? Home for example would surely just pass to my partner along with any equity I have in the house, she gains from that?

Are pensions liable or specifically are pension life assurance policy payments for death in service liable? 

As mentioned, head in sand not thinking I would ever fall foul but the recent IHT talk (GE bribes) has made me pay a little more attention. 

Thanks

DullGreyGuy

Pensions, death in service etc all should be outside the estate so don't count. 

How do you own the house? Joint tenants or Tenants in common? If the former then the property isn't part of the estate as it the other tenants already legally own 100%

Keep_pedalling

No savings? What about your partner’s net worth?

You should consider marriage or a civil partnership you net worth will increase as you pay the mortgage down and it is easy to slip into IHT territory and forgetting about it. Your DB pension may not pay out to a partner.

Both of you should make wills and both of you should put LPAs in place. 

Daniel54

Is your partner nominated as the beneficiary of your DB pension? Some schemes need to establish that there is a marriage or civil partnership and you would be wise to check.Either way,the notional value of the DB scheme will not come into play,only the  ongoing income stream.


If I were you I would worry less about inheritance tax and more about the financial security of you partner and children.Like it or not,marriage or a civil partnership makes this area of planning very much easier.

CSL0183

DullGreyGuy said:

Pensions, death in service etc all should be outside the estate so don't count. 

How do you own the house? Joint tenants or Tenants in common? If the former then the property isn't part of the estate as it the other tenants already legally own 100%

Thanks, that’s great that any pension related sums are outside the estate. Has put my mind at ease there. 

Reference house, we are joint tenants but I have a minute of agreement setup (Scotland) for the initial deposit in place for £50k that in the event of separation I would get that sum paid back before the rest is split 50/50. In the event of my death, that £50k would be forfeited though. 

So good news there too that my house would be outside my estate also and just naturally pass to my partner. 

In summary, if I was to be hit by a bus tomorrow I have nothing to worry about with reference to falling foul of inheritance tax. 

CSL0183

Thanks for the feedback, much appreciated. I will look into my DB nomination as at the moment; no, nothing has been done about that. It’s a military pension so will contact them soon. The only progress I have made into protecting her and the kids was to nominate her for DC pension / life assurance. 

Will also look at the LPA side too. 

Marriage of course would tie a lot of this up, after 17yrs together perhaps I should rethink this.

pjs493

CSL0183 said:

Thanks for the feedback, much appreciated. I will look into my DB nomination as at the moment; no, nothing has been done about that. It’s a military pension so will contact them soon. The only progress I have made into protecting her and the kids was to nominate her for DC pension / life assurance. 

Will also look at the LPA side too. 

Marriage of course would tie a lot of this up, after 17yrs together perhaps I should rethink this.

Definitely name your beneficiary(ies) for a MOD pension. If you haven't nominated someone they will decide who it goes to and if you're not married then only dependent children would receive a pension until they finish formal education (either A levels or uni - capped to age 23, in other words enough time to take a gap year and complete a four year degree). A spouse receives it for life. Make sure all your children are listed in JPA too to simplify things. My understanding is that only spouses and dependent children can benefit and only if you're named on their birth certificates.

With dependent children I'm not even sure that an unmarried partner could be a beneficiary at all, but I'm not 100% sure on that so it might be worth you checking that out. For example, my sister had me named as a beneficiary on her NHS pension when she first started working in the NHS, at the time she didn't have a spouse or children so I was a natural option for her to name. Now, I assume, she's listed her husband and children and removed me. But if I'm still listed it's likely that her NHS pension would go to her husband and children and I'd be overlooked anyway.

With MOD pensions, the first two or three children get a set percentage of what your final pension would be (they assume you'd serve until 55 and work out the final pension figure from that for all beneficiaries) and the percentage diminishes for subsequent children (or they all get a smaller share, I'm not 100% sure). My husband died in service without any named beneficiaries on his MOD pension, but because we were married and had children within the marriage (with him named on their birth certificates), it was all very straightforward.

It might also depend on which AFPS you're in or if you have a mixture of AFPS05 and AFPS15 for example. The beneficiaries would receive a letter discussing the McCloud remedy and whether they want to take the original figure or the figure worked out after the McCloud remedy. It's fairly well explained in the letter and easy to see which offers more money in the annuity.

You can do a basic will on JPA (you may have been encouraged to do this if you've been on ops), but look into the free wills service too for something more comprehensive.

Keep_pedalling

CSL0183 said:

DullGreyGuy said:

Pensions, death in service etc all should be outside the estate so don't count. 

How do you own the house? Joint tenants or Tenants in common? If the former then the property isn't part of the estate as it the other tenants already legally own 100%

. 

So good news there too that my house would be outside my estate also and just naturally pass to my partner. 

Joint tenancy does not place your house outside your estate for IHT purposes. If your individual share  ends up exceeding your NRB and you don’t formalise your partnership IHT will be due on the first death as you can’t apply spousal exemption.

Marcon

CSL0183 said:

I have 5 children and no will other than on my pension beneficiary form that everything is left to my partner who would then dish it out between the 5 kids as she sees fit. 

If I was hit by a bus tomorrow, what would happen to my estate per se? 

If you are only 40, the chances are that at least one of your 5 offspring is under the age of 18. What have you done about guardianship arrangements if you're with your partner and the bus hits you both...? Not having a will when you  aren't married but do have children is a sure fire way to leave things in chaos and misery for your surviving family members.

SVaz

Get married. That’s it. 

mattsaze

Having to deal with my late father’s estate, he left no will, no plans and his finances were not that well ordered and had to work a lot out. He also kept everything.

From my experience I’d say please think of your children, make a will TODAY! We found an unopened DIY will kit amongst my father’s things, if only he’d filled it in. But also, do try and get things in order, it will definitely improve your lasting memory! But wish you a long and happy life, married or not (and I’m over 20 years in relationship and not married!)