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How a pension can save inheritance tax - a worked example.

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 to save, 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 –

and 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 loves

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

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