When the Pension rules changed in April 2015, Pensions became a lot more attractive for a number of different reasons.
One of these was the fact that Pensions could be used as an account to invest money into and avoid Inheritance Tax. The reason for this is that Pensions are usually exempt when calculating the value of your estate for Inheritance Tax purposes. So the money inside your Pension doesn’t count. That’s huge when you consider 40% of the value of your other investments could be taxed and taken away from what your beneficiaries would otherwise inherit.
The fact that Pensions are usually exempt from Inheritance Tax is not new. What is new is that you no longer have to use your Pension in your lifetime. You can use it as a pot of money that builds up during your lifetime, and if you never need it, you can simply pass it on. That makes it much more interesting when you consider you can also earn tax rebates by investing into a Pension.
So when we recently considered for a client of ours what they could do with a substantial amount of money that they may or may not need, our advice for them was to invest it into their Pension. They can still access it if they need to, they’ll turn it into substantially more then they invested overnight, and it’ll be outside of their estate instantly for Inheritance tax purposes.
Consider a situation where you can invest £8,000 into a Pension, receive a £2,000 tax rebate from HMRC paid directly into the Pension, making your £8,000 into £10,000 overnight, then leaving it in the Pension for life so you never have to pay back that rebate. What’s more, your beneficiary, let’s say your child, could then keep the Pension as a Pension so that they’ve got a fantastic start to their own retirement planning and a good-sized pot ready for them when they want to retire.
If you’re a higher rate tax payer then you can receive additional tax rebates which would give you back an extra £2,000 so the net cost of the original Pension contribution would be £6,000 but you’ve got £10,000 to pass to your children free of Inheritance Tax!