When it comes to pension lump sum death benefits, the scheme administrator/ trustees typically decide who receives these benefits, whether they come from a personal or occupational pension. Beneficiaries are selected from a list of eligible discretionary beneficiaries specified in the pension policy documents, if the trustees/ administrator have discretion over the payment of death benefits, these benefits are generally exempt from inheritance tax (IHT).
Members can state their preferences through completing an Expression of Wishes, indicating who they would like to receive their benefits upon death. Although this document is not binding, there is an expectation that the member’s wishes will be considered, maintaining the IHT exemption.
If a pension is inherited while in drawdown and stays invested within the pension environment, it remains outside the beneficiary’s estate. However, if inherited funds are withdrawn and not spent, they will become part of the beneficiary’s estate upon death.
While the member is alive, their pension fund, even if subject to a discretionary trust, will not incur the IHT periodic or exit charges that typically apply to discretionary trusts. Retirement benefits held in trust for the member and death benefits for the beneficiaries do not constitute a gift with reservation.
Generally, pension death benefits are IHT-free. However, there are exceptions when these benefits may be included in the deceased’s estate for IHT-purposes.
If you have pension plans, such as a SIPP, personal pension, occupational AVC, or any legacy plan, get them reviewed by a financial adviser to ensure they remain IHT-free upon death.
Be cautious about taking pension advice, particularly regarding transfers or contributions when in ill health, as incorrect decisions can jeopardise the IHT exemption.
If uncertain, schedule a complimentary IHT and pensions initial review with Harold Stephens or your adviser. Call 0117 3636 212 or email office@haroldstephens.co.uk.
