Ed: One person’s trash can be someone else’s treasure and the things we value most aren’t always the things that cost lots of money. And when it comes to the things we inherit or that we pass on ourselves, the most cherished items aren't always the most obvious and that can be the case with your finances too.
Did you know that out of all your financial assets, it’s those held inside a
pension that could potentially benefit your family and loved ones the most?
Since 2015, money you hold in a defined contribution pension, no longer faces the death tax if you die. Die before age 75 and this money can pass to beneficiaries of your choosing with no tax to pay, whether that’s as a lump sum or as an income. Die after 75, beneficiaries simply pay tax at their rate of income tax.
I met with Carolyn Jones, Fidelity’s Head of Pensions Product, to find out more.
Carolyn: Broadly, pensions now will be more tax efficient if they’re defined contribution than say property or other investments passing them on. So yes, you seriously need to think if you’re not going to spend all your money on yourself and you do want to pass some on, what you should spend first in retirement.
Ed: We’re talking here about defined contribution pensions. How does a situation with those compare to defined benefit schemes or even
annuities that people might have bought for income?
Carolyn: Defined benefits, it will largely depend on the scheme. But usually in a defined benefit scheme, when you die they will give an income to a dependent. So that might be someone you’re married to or someone you’re cohabiting with or children that are still in full time education, and usually that’s all you can do with your pension.
Annuity, that will depend on the terms of the annuity you bought. You may have bought what’s called a ‘guarantee’ that the annuity would pay out a lump sum if it hadn’t paid so much tax. So, typically that might be a 10 year or a five year guarantee. But, again it will depend on what you’ve bought at the time and that won't be changeable.
Ed: What practical steps do people need to take to make sure that their planning is in order?
Carolyn: Well firstly you need to understand what pensions you’ve got, so have you got defined benefit pensions, have you got defined contribution pension? You may want to take advice on what you should spend first and how best to shape your
I think most importantly you need to fill in your expression of wish. So that's something that your scheme administrator holds that details your wishes should you die. And that means you can articulate what you want to happen to your money and you can articulate one person or several people and that really helps administrators carry out your wishes.
Ed: No one likes to think about what happens after they’re gone but most of us want to do whatever we can to look after friends and family when that happens, and making smart use of a pension from an inheritance point of view is a really good way to do that.