Over 50s restrict pension withdrawals to gift £50,000 to loved ones
Just last week it was revealed that savers had withdrawn more than £6bn since the new pension freedoms came into effect last April.
But research from Saga Investment Services has found that a quarter of over 50s with a private, defined contribution pension who are using flexible drawdown, plan to leave on average 56% of their pension behind. In cash terms, this is around £51,000.
The large amount could be due to pension savers taking advantage of the new tax-efficient pension rules upon death, the report said.
Under the pension freedom introduced in April 2015, new tax rules were applied to any remaining savings left in someone’s pension after they died.
For someone dying under the age 75, their heirs can now inherit their remaining pension tax free.
For someone dying over the age of 75, any inherited pension is taxed at the beneficiary’s personal income tax rate.
Despite the desire to pass on their savings, Saga found many over 50s were confused about the rules and how their money would be taxed.
Of the near 2,000 people surveyed, one in five (22%) believed only their spouse could inherit the funds. Less than half (42%) correctly stated that remaining pensions could be left to anyone they nominate. The rest didn’t know who could inherit left over pension savings.
The survey found that just one in four (25%) people planning to pass on their pension had taken professional advice on the issue.
Important to complete an expression of wish form
Gareth Shaw, head of consumer affairs at Saga Investment Services, said: “Thanks to the changes made in April last year, pensions have become a far more attractive way to pass on your wealth and bypass Inheritance Tax (IHT). Typically, pension savings are ringfenced from IHT, and therefore people could inherit significant sums either paying a lower amount of tax or no tax at all, depending on their income and the amount they inherit.
“If anyone is thinking of passing on their pension, it’s important that they complete an ‘expression of wish’ form with their pension provider and nominate who they want their pension to go to.
“However, there’s a balance to be had here – the desire to pass on money from a pension should not overpower the need to have financial comfort in retirement. With any inheritance tax planning, be it pensions or other assets, professional advice will be essential to help consumers get that balance right.”