UK Pension Tax Relief And How To Lower You Pension Tax

Last Updated: 22 Oct 2020
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What You Need To Know About Pension Tax Relief

Next to your retirement, your loved ones’ future is the most important thing you have to plan for. Knowing that you have taken all possible measures for pension tax relief will give you enough assurance that they can live comfortably even after your death.

Therefore, it is wise to be informed about the benefits your beneficiaries will receive from your retirement plans and the extent of the government‘s involvement with regards UK inheritance. Read our detailed article about how you can transfer your UK-based funds abroad with QROPS Pension Scheme.

UK Pension Inheritance From A State Pension

The benefits of a Basic State Pension1  can only be given to you; it is non-transferrable even to your spouse or children. However, you can opt to defer availing yourself of the benefits when you reach the State Pension Age.2 

In case of your death, the government will have to pass those benefits to your surviving spouse/civil partner and other beneficiaries. Some of the UK inheritance they could receive includes the one-time bereavement payment, the one-year bereavement allowance, and the widowed parent’s allowance.

If you die after starting to claim the deferred benefits from your Basic State Pension, then the government will increase the payments being made to your surviving spouse/civil partner and other beneficiaries. They can also be entitled to as much as 50% of the payment you are receiving before your death.

If you also contributed to an additional State Pension – the State Earnings-Related Pension Scheme (SERPs2 ) or State Second Pension (S2P3 ) – then your benefits will also be passed on to your surviving spouse/civil partner and other beneficiaries. We’ve prepared a detailed head-to-head comparison between qrops and sipps. Check our infographic!

Find Out More About UK Pensions.

From A Personal, Stakeholder, Or Company Pension Schemes

UK schemes, whether personal, stakeholder, or company pension, provide rules and conditions as to how you want to enjoy your benefits and to whom your UK inheritance will be passed onto.

If you die before you can claim your fund, your beneficiaries will be entitled to all the benefits depending on the agreement. The company will have to provide either any of the following:

  • Lump sum4  that may or may not be tax-free
  • Monthly periodic payments of a specific amount
  • A return of your contributions

All these benefits may or may not be subject to an inheritance tax and other related charges depending on the company.

How a Guarantee Period Affects Your UK Inheritance

UK schemes usually provide you the option of taking a guarantee period after your retirement which can be between 5-10 years. If you die within the time of the guarantee period, your balance will be paid out to the nominated person or to your estate.

Do you want to receive all the benefits from your international pension plan? If so – do NOT miss our detailed articles! Be prepared and well informed. If there is no guarantee period, then the amount of UK inheritance that will be awarded to your beneficiaries depends on the decision of your scheme’s administrator or trustees.

Don’t miss our article about Pension Entitlement And Drawdown. It will help you make the right move with your pension scheme.

Our Advice For Pension Tax Relief

You can seek the help of different institutions or professionals when it comes to dealing with your UK inheritance:

  • Administrators and/or trustees of your scheme
  • Independent Financial Adviser (IFA)
  • The Advisory Service
  • The Ombudsman
  • The Pension Regulator

What Is UK Inheritance Tax?

Inheritance tax UK is the tax5  that your heirs or beneficiaries pay to the government on the estate that you have left upon death. Where estate taxes can amount to 40% of your estate, taking pension tax relief measures while you are still able to, makes financial sense.

We’ve prepared a detailed article about pension transfer. If you are seraching for information on this subject make sure you don’t miss it! In most cases the inheritance tax will amount up to 40% of the value of inheritance.

What Is Considered An Estate?

Everything you own – from that summer home at the lake, rare art pieces, and vintage cars to your bank accounts, real estate deals, stocks and bonds, and even your cash stashed in your tin cans – all of these considered as your estate and are subject to the inheritance tax UK. The taxable value will be determined after an appraiser determines the fair market value of your estate.

Are There Any Limitations

If your estate has a value lower than the minimum threshold, which is £325,000 in 2012-13, then you do not have to pay any inheritance tax UK. Usually, the state takes away 40 per cent of the total value of the estate if it is worth over the minimum threshold. In other cases, the heirs or beneficiaries only pay 36% of the estate value if it is deemed as a charitable donation.

Is IHT Mitigation Legal?

Of course, for most people, they do not want to see their hard-earned money go into somebody else’s pocket instead of their loved ones which is why pension tax relief continues to be such a hot topic. But if the fair market value of your estate exceeds the minimum threshold, do not lose hope.

There are legal ways where your heirs or beneficiaries can avoid seeing the taxman. You do not have to pay for inheritance tax UK under these specific circumstances:

  • If you transfer your estate or give gifts to your spouse or civil partner during your lifetime. Even if the value is over the threshold, as long as s/he is a permanent residence in the UK, your estate will not be subject to any tax.
  • If you make any charitable gifts or donations to qualified organisations and institutions during your lifetime.
  • If you give away something as a gift to someone. No matter how much is its worth and as long as you stayed alive for seven years after its occurrence, it would be exempt from any tax.
  • If you give away up to £3,000 each year. It can be a single instance or several instances – as long as it adds up to that amount, and then there is no required tax to be paid. Use your allowance from last year if you want to, but only after you have given away your present year’s allowance.
  • Your small gifts worth up to £250 to as many individuals as you like – no tax will be deducted.
  • Your wedding gift of a certain amount for someone – it is also tax-free.
  • Your farm, woodland, heritage, or business ventures can offer some tax relief.

Who Pays Out The Inheritance Tax?

After death, an executor or a personal representative usually handles the estate affairs of the deceased, which includes paying the UK inheritance tax. If the estate is already in a trust, the trustees will be responsible for paying the tax on all assets included therein.The responsibility to investigate options for pension tax relief remains with you.

John lawson rndlg

John Lawson

John advises business, individuals, and organisations on pension planning. As you’ve probably realised by now, we’re invested in helping people like yourself understand a little bit more about how equity release options work.

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