Tax Planning

Two items of data to utterly change your retirement and inheritance tax planning technique




When it comes to planning old age and inheritance taxes, many people are more concerned about what their money will do over the course of their lives than they are once away … writes Michael Hawthorne, Chartered Financial Planner at True Bearing.

When deciding on their retirement income, considering the tax on their death estate is rarely high on the list. It is important that you structure your money according to the life you want to live first. However, if there is a potential inheritance tax burden to be paid in the event of your death, especially if you have total assets above the zero rate range, then you should pay special attention to the facts surrounding my client’s story.

My client, let’s call her Brenda, has enough income from her work and state pension to pay for her desired lifestyle. Brenda has £ 15,000 in an old AVC (technical jargon for one of the many company pensions) from a previous employer. Brenda is single and has total assets (property, savings and possessions) in excess of £ 325,000, which is the estate tax threshold.

“The pension doesn’t matter much”

Brenda’s plan was “to redeem the pension to invest again” because “the pension did not bring much” and she “did not need the income”.

Let’s play this scenario:

£ 15,000 paid from AVC to bank account
£ 12,750 received in bank account after 20% tax on 75%
£ 5,100 additional immediate increase in inheritance tax liability on death
£ 7,650 is the total amount remaining in the estate after the estate tax has been paid

Brenda has a deep understanding of employment taxes, but wasn’t aware of two key pieces of information that completely changed her financial plan for retirement.

1. Did you know that in most cases a defined contribution pension (more technical jargon for most types of personal and some occupational pensions) is not subject to inheritance tax? And due to the pension freedom introduced in 2015, can all funds of this type of pension be accessed from the age of 55?

How does that change something? The £ 15,000 in the AVC could remain in an annuity / AVC. Inactivity, Brenda’s estate actually saves £ 7,350, as if Brenda dies before the age of 75 the full £ 15,000 will be left to her estate. Brenda’s investment strategy needs to be tweaked a bit to take into account that it is expected to be invested for over 25 years.

2. Even though Brenda is retired, she can still contribute to a pension. Brenda can pay an annuity of £ 2,880 annually and receive income tax relief of £ 720 until the age of 75. Each £ 2880 contribution is also paid outside of their estate for inheritance tax purposes, which is an inheritance tax saving of £ 1152 per year. This is all before considering any investment returns.

With two additional seemingly minor pieces of information, Brenda has completely changed her retirement strategy that will allow her to continue leading the life she desires, but will likely lower inheritance tax on her wealth by tens of thousands of pounds over the course of her life as she continues Granted access to funds when they are needed.

Who Said You Don’t Have Your Cake And Can’t Eat It?

While I have outlined the main points of Brenda’s case, it should be stressed that the world of pensions is complex and this solution will not be right for Brenda for others. This is an area for professional advice, but I also warn – there are significant benefits to it!

* The FCA does not regulate tax or estate planning. This blog is based on our understanding of current tax law.

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