Currently if you die before you have started to draw your pension, the value of your pension fund will not usually be subject to inheritance tax (IHT) at 40%, as it is excluded from your estate. However, there can be a 55% tax charge where your pension fund is passed to someone else under your will, especially if you die aged over 75.
From 6 April 2015 the 55% tax charge will be abolished. If you die before you reach age 75 you will be able to pass on your pension fund on death to any one you choose without a tax charge. The new owner of the pension fund will have no tax to pay when he or she makes withdrawals from the fund, whether those withdrawals are in the form of a lump sum or as income drawdown.
If you die aged 75 or more the person who receives your pension fund will pay tax at their marginal income tax rate on income drawdowns they withdraw from that fund, and there will be no restriction on the amount that person can withdraw from the fund. However, if the beneficiary of the fund wants to take all the value out as a lump sum, there will be 45% tax charge, although that may change from April 2016.
If you die after you have bought an annuity with your pension savings, the value of your pension can’t be passed on, unless the annuity contract provides for a lump sum to be paid on your death.
These changes mean that tax planning for older people needs to be re-thought from the bottom up to take into account the ability to pass on tax-free a significant pension pot. If you have any questions don’t hesitate to contact me at firstname.lastname@example.org