How a pension can save for inheritance tax - a worked example is below.
This article shows you the numbers behind how effective a pension is for inheritance tax planning. Paying into a pension should be your first thought when planning on saving, not just for retirement but also for inheritance tax.
|
Old Pension on Death Rules |
New Pension on Death Rules |
|
Not Touched (no pension benefits taken) = 100% fund paid on death pre and post 75 If some pension benefits have already taken = 55% tax Charge Loved ones get 45% of the fund |
Not Touched (no pension benefits taken) = 100% fund paid on death pre and post 75 If some pension benefits have already taken = Pre 75 = No Tax Post 75 = 45% tax charge but goes down to own income tax rates thereafter. Therefore loved ones get either: 100% of the fund if death before 75 Death After 75 55% of fund paid on death after age 75 – in 2015/16 80% of the fund paid on death if they are basic rate tax payers after 2016 60% of the fund paid on death if they are high rate tax payers after 2016 55% of the fund paid on death if they are additional rate tax payers after 2016
|
WORKED EXAMPLE BELOW. Personally Pay into £80 = Made up to £100 - Compared to ISA/Savings
|
PENSION: Personally Pay in £80 = Made up to £100 (with tax relief) |
ISA or GENERAL SAVINGS: Compared to £80 into savings |
|
No pension benefits taken yet = £100 on death pre and post 75 If some pension benefits have already been taken= Pre 75 = No Tax = £100 to loved ones Post 75 = 45% tax in 2015/16 but tax rate on death then goes down to beneficiary's own income tax rates thereafter = e.g. 20% Income Tax = e.g. £100 pension fund on death = net £80 for loved ones So here’s an idea Paid in £80 – get back £100 (or £80 no loss) Or paying in and if die before age 75. Leave to Children – they can then draw tax free until they are age 75 etc. Virtually tax free for years and year. Best Case = Paid in £80 £100 Paid to Loved Ones But if you die after age 75 from 2016: Worst case Basic Rate Taxpayer = £80 to loved ones Worst case Higher Rate Taxpayer = £60 to loved ones Worst Case 45% Additional Rate Tax Payer = £55 to loved ones (and all these worst case scenarios are only if they draw the funds out). They are all still better than ISA or other direct investments.
|
£80 into ISA = £80 Death – if over IHT threshold = 40% Inheritance Tax = Tax £32. Net Paid to Love ones = £48 Best Case and Worst case Best Case = Estate is Below Inheritance Tax Threshold PAID IN £80 Paid to Love Ones £80 Worst Case = Estate is Above Inheritance Tax Threshold PAID IN £80 Paid to Love Ones £48 |