Did you know that inheritance taxes do not as a rule apply to pensions?  There are some circumstances where it can be argued they should apply but it is quite rare for these to be proven. 

To benefit from the exemption though you do need to have your pensions set up correctly and keep an audit trail of the decisions you have taken over the years.  I have been quite detailed with my planning as I have a rule, each meeting is followed up with a client letter to document the decisions we took and why.  Skipping this part of the process or having it too concise does not give your executors much ammunition if HMRC ever tried to attack them for inheritance tax on your pensions on death.  Not a very cheery topic for a blog but I would argue a vital one to understand.

It is quite often in tax that if you can demonstrate your case clearly that over time you took a certain course of action without the primary objective of escaping tax, your executors will win any challenge.  Naturally, having an experienced financial planner and investment team in your corner also helps!

But back to pensions and taxes on death.  If you have chosen to draw an income (or not) from your pension in retirement it is quite common you will have a either a Self-Invested Personal Pension or a Small Self-Administered Scheme.  Both allow a transfer of the remaining pension fund on death to any beneficiary you have nominated.  This can be spouse, children, charities, or even good-looking financial planners!

What is important, is for the pension operator or trustee to have prior knowledge of to whom you would like your pension fund paying to on death.  This better facilitates the investigation they conduct in the event (again why it is a good idea to have kept detailed annual notes and an advisor to explain them). 

The beneficiaries can then hold their inherited pension alongside their own for lifetime allowance purposes, effectively a double allowance. 

The tax rules on the inheritance of the pension fund, while not inheritance tax, relate to the age of the member on death.

1. Death before age 75 sees the pension fund tested against the original members lifetime allowance (if there is an excess that will be taxed at 25%) and allows the beneficiary to draw against the inherited pension fund at any age and without income tax.

2. Death after age 75 has no test against the lifetime allowance of the original member and allows them to draw against the inherited pension fund at any age but subject to their marginal rate of income tax.

Accordingly, it is not as straightforward as first thought and there is a great deal of planning the original member can do to minimise these taxes but there is no current method of passing over the pension fund early before death.

As always, if anyone has any questions on this topic, please let me know.  Being in pensions since 2001, I have built up knowledge in this area across multiple different pension regimes and rule changes.

Thanks for reading.