Can I leave unspent pension savings to my heirs?

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Ask the expert at Smith & Pinching about leaving unspent pension savings to heirs - Credit: Getty Images/iStockphoto

I have a private pension as well as my Local Authority pension and have been building up the former for some years. It’s now worth about £250,000. I’m due to retire next year and I think that my LA pension will more than meet my everyday needs, so am wondering what I should do with the private one. Should I take it out of the pension and invest it so I can leave a good amount to my children?

Matthew Beck Chartered Financial Planner with Smith & Pinching

Matthew Beck is a Chartered Financial Planner with Smith & Pinching - Credit: Smith & Pinching

Matthew Beck of Smith & Pinching responds:

The first thing we would need to check is that your LA pension is indeed going to be sufficient for your needs throughout retirement. We’d do that using lifetime cashflow planning which allows us to project forward under different scenarios. Life can throw up unexpected challenges, so it’s important to safeguard your financial security.

Having successfully demonstrated that you won’t need to draw on your private pension, we would then need to explore your options. The important thing to know is that when you die, you can normally leave any unspent private pension savings to your heirs. In addition, unspent pension won’t normally count as part of your estate for Inheritance Tax (IHT) purposes so leaving it in a pension until your death can be a useful way to mitigate any future IHT.

However, there is a set of tax rules that apply to inherited pensions. The rules are complex so do get specific advice but, broadly speaking, if your heirs take inherited pension benefits and you died before you were age 75, there is normally no tax to pay, unless your total pension savings exceed the Lifetime Allowance for pensions (currently £1,073,100). If you died after age 75, the inherited pension would normally be taxed as part of your heirs’ income – and again there may be a tax charge on your fund if your total pension savings exceed the Lifetime Allowance. Your heirs may be able to take pension benefits as either a lump sum or as an income.

You don’t need to take your pension savings out of the pension wrapper for it to continue to benefit from investment growth, but you should review the investments in your portfolio on a regular basis to make sure they are performing as expected and make adjustments as necessary. It can stay in the pension fund until your death if you don’t need it. I suggest that you take independent financial advice from a Chartered Financial Planner at this stage so that you can look at the whole picture and plan accordingly.

Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

For more information, please visit www.smith-pinching.co.uk