by Douglas Blanchard, Financial Adviser at James & George Collie Financial Management

Now that the liberalisations to the pension system have had an opportunity to bed in, one of the most generous – and transformative – options to consider is the ability to pass on virtually all types of pension funds outside of the saver’s estate, for Inheritance Tax purposes.

So, how does it work?

As with all estate planning, the complexities mount as plans are tailored around individuals’ circumstances. However, depending on your viewpoint, the following “Three Steps (to Heaven)” show clearly how anyone with a pension and whose total assets exceed £325,000 (£650,000 for a married couple) can limit the impact of death duties by simply re-arranging their assets and altering their financial planning priorities.

Step 1: Put as much inside your pension as you can – while you can

Any contributions to your pension attract tax relief and accumulate income and gains free of tax once inside. The pension regime is more liberal than the ISA regime in that you can invest more by way of the annual allowance, currently £40,000 and the rollover of the previous 3 years allowances, and hold a wider range of investment types, for example commercial property.

In addition to the annual allowance on contributions, there is a lifetime allowance limit on pension funds built up and from 6 April pension assets must not exceed £1M in a saver’s lifetime.

Nevertheless, who could argue with the tax-free uplift in the pension as well as the ability for a married couple to pass on, free of Inheritance Tax, up to £2M of their pension pots to their loved ones?

Step 2: Ensure you have enough outside the pension to see you through retirement

When you die you want to minimise non-pension assets above the £325,000 (£650,000 for a couple) death tax threshold.

The aim ought to be to leave your pension intact to give to your heirs while you live on, other potentially taxable assets. People are increasingly using non-pension assets like ISAs to generate retirement income and a growing area is the use of property, through buy-to-let holdings, to provide rental income.

Step 3: Now consider gifting or using “Inheritance Tax-proof” investments

If your pension is well funded and you have sufficient non-pension savings/investments to live on, think about cutting tax by gifting. Either £3,000 per individual or gifts from recurring income to any level, is the most you can give annually with no Inheritance Tax consequences. Above these limits, you need to survive for 7 years for the gift to fall entirely outside of your estate for death tax purposes.

If you do not want to give assets away, certain shares (the AIM market) and other investment schemes related to funding for enterprise are free from Inheritance Tax. As these tend to be higher risk, it is an area of planning where individuals need to seek specialist advice so that they can be completely appreciative of the investment proposition.

If you wish to undertake a review your estate planning to see if the new pension rules, or any of the other existing options, provide you with an opportunity to maximise the amount of assets you leave to those you care about upon death, then please call 01224 581581 to arrange an appointment with one of the James & George Collie Financial Management advisors.