The pensions revolution of April 2015 means pensions can now play an important role in inheritance tax planning (IHT).

Whilst this may not have been the intention, as pensions are really designed for providing income in retirement, the new pension rules have created the opportunity for you to reduce significantly your liability to IHT, to the gain of your beneficiaries.

From 5 April 2015, pension benefits can now often be left to beneficiaries without any liability to IHT, providing them with access to your remaining pension pot. Pensions are now normally completely tax free on death before age 75.

Before these new pension rules were introduced, pension funds were taxed at up to 55% on death after 75 or after you had taken tax-free cash or an income. Because of this, pensions tended to be spent before other options, such as ISAs, as they were potentially subject to more tax upon death. Under the new rules, there is usually no IHT liability.

In addition, beneficiaries can withdraw money from the pension tax free as well, dependent on age. If death occurs before aged 75, beneficiaries can access the whole pot free of all taxes. If death occurs after aged 75, beneficiaries will be taxed at their marginal rates on any withdrawals. In both cases, however, the lump sum death benefits will be paid free of IHT.

This means pensions have now become an effective IHT planning tool and should be considered as part of your overall IHT strategy.

It also begs the question as to whether you should fund your retirement differently, using taxable investments first, ISAs next and pension pots as a last resort.

Several other rule changes also impact upon IHT planning. These include the tax benefits of ISAs now being potentially transferable to a spouse on death. In addition, you can also now hold AIM shares in an ISA and many qualify for an IHT exemption after two years.

As you approach retirement, your aim should be to organise your assets in the optimum way, to ensure a secure financial future for you and your partner first and then to consider the IHT implications. However, the new rules do merit consideration and may mean you should revisit your overall IHT and investment strategies.

For more information or to discuss your IHT planning, contact Kellands.

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