While most people are aware of pension freedoms, and the ability they give to drawdown on your pension pot early, very few are aware of the benefit they give to your family when a pension is inherited.
And neither do some pension providers, apparently.
Under pension freedoms rules, most people pay no tax for inheriting pension savings from someone who died before reaching the age of 75. Beneficiaries can also choose how they would like to receive the cash – either as a lump sum or as income in the form of an annuity or pension drawdown.
But according to the Telegraph, pension providers have been slow to react to the rules introduced three years ago, including some of the UK’s biggest providers.
Many clients still have older-style pension plans, often with ‘consolidator’ firms such as Phoenix and Aviva, which are not offering beneficiaries the chance to take an inherited pension pot as an annuity or pension drawdown, leaving them wide open to income tax and capital gains tax (CGT) on future investments. This could also have an impact on their own heirs, as the lump sum would count fully towards their estate.
Taking the pension as a drawdown or annuity is often a much more tax-efficient strategy. That’s because the pot would continue to receive the protection of the pension wrapper, while it could also be left to heirs inheritance-tax free.
It’s possible that many thousands of savers have been caught out by pension providers’ lack of flexibility.
If you are an heir in a similar situation, it’s possible to reinvest the lump sum back into a pension scheme, but this simply isn’t feasible with large amounts of money due to deposit restrictions.
If you’re reading this as a pension saver and you’re unsure how your provider will offer your pension to an heir, you should make checking the fine print a priority. You could then consider transferring your pension to a different provider.
As always, always speak to a professional financial advisor before making life-changing decisions.