Since 2015, more clients have been using pensions as tools for passing money down the generations. It is generally assumed that because the money is in a pension, it can pass down and remain within the pension wrapper, but this is not always the case. Too often, it is not discovered that the only option is to pay out a lump sum until after the policyholder has passed.
Plans written before 29 April 1988 continue to form part of the plan holder’s estate, whereas newer pensions do not.
So what can be done to ensure your pensions pass to who you want to benefit and that the funds can remain in pension if that is the chosen option?
The key point here is what options the provider has. If you have an old pension (pre April 1988), chances are the only option is to cash the plan in – check with your provider regarding this. Older plans may have other benefits which may be valuable to you such as guaranteed annuity rates. Transferring to a new provider means these are lost.
A lot of closed companies, do not have a drawdown option, so again the only option is to cash the plan in.
As long as the provider you are using has the option to transfer the fund to drawdown on death, this then gives the beneficiaries options on what they want to do.
While cashing the plan in might be what ultimately happens, it does take the money from an Inheritance Tax (IHT) advantaged investment back into the recipient’s estate, where it could potentially be liable for IHT.
So, what can you do if your provider does not have an option to use drawdown?
Very simply, you should consider transferring to a new provider who does have drawdown options. Since the introduction of pension flexibility in 2015, most new pensions do have drawdown options. You should always take advice before transferring pensions to ensure that you are not giving up any benefits that could be valuable.
This is where we can help. We can advise you in this area and offer actively managed risk-graded portfolios. If you would like more information or any advice on this article then please get in touch by emailing Chris Slater cslatter@ellacottswealth.co.uk or Jo Mara jmara@ellacottswealth.co.uk.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
