Personal Finance: Reducing taxation in retirement

Retirement planning and handing down your pension can benefit the entire family, so include your children and grandchildren.

Pensions and savings can be passed down to the next generation, like investment properties or family homes. When planning for retirement, you should consider your entire family and how your pension savings may benefit your loved ones.

Retirement planning and inheritance

Many people believe that inheritance matters should be considered when they write their Will. Once they are done, they can be forgotten about. A well-written Will, kept current as your circumstances change, is essential to ensure your beneficiaries are taken care of.

Instead of building up your assets, then deciding who gets what in your Will. It’s better to consider the assets you want to leave for your loved ones and then create a financial plan around them. This subtle shift in thinking can make a big difference in cementing your family’s financial future.

Handing down your pension to your loved ones

Many are diligent savers who have built up retirement savings and other assets. These assets could be valuable and passed on to the next generation. But handing down your pension is not quite that simple. It is important to seek financial advice well before your retirement date. This will help you determine what you can save, what you will need, what you can leave for your loved ones, and how. Defined Contribution pensions, however, usually fall outside your estate and therefore are not considered when calculating Inheritance Tax.

A pension does not have to be reserved for your children or relatives. When handing down your pension, you can leave it to anyone you wish. It is becoming more common for people to leave their pensions to their grandchildren rather than pass them on to their children. This allows them almost to become a family trust.

Remember that the right to receive the state pension is not transferable. Similar to the Final Salary and Defined Benefit pensions, a spouse may receive a payout if you die.

Sometimes, these pensions can be converted to a pot of money in a Defined Contribution plan that can then be passed on to an heir. You should consult a financial advisor for further advice.

Defined contribution pensions are complicated. It depends on your plan, your age, and whether you have accessed the money. Sometimes, even your best-laid plans could become a problem for your loved ones, which is why working with a financial advisor on such complex financial matters is best.

Key points to remember

  • The finances are given to the recipient as a pension. There could be tax consequences if you withdraw money before reaching the state retirement age.
  • The recipient usually can choose whether they want lump sums or regular income from the pot.
  • If you die before 75, lump sums taken from the pot are exempted from tax.
  • If you die before age 75, most withdrawals will be subject to income tax.

Get expert financial advice on handing down your pension

How you plan for retirement can affect how inheritance matters are accounted for. Would your children appreciate a boost to their pension or mortgage paid off?

Another example is that you could consider handing your pension to your grandchildren. A parent or guardian can then continue to contribute to the pension for their child and add any top-ups eligible for tax relief. It may seem premature to give the under-18s a head start in retirement planning, although this generation will encounter high property prices and hiked university tuition fees.

Also, the pension they will receive through their workplaces will be less generous than in the past and will make retirement very different over the next decades. Financial advisors can help you look at your finances holistically. They will take into account your entire family paired with their needs and plan tax-efficiently for their future.

Talk to a GSB Capital Partner if you are interested in discussing retirement and inheritance issues, whether small or large.

Always remember that funds invested can rise or fall. It is possible to get less back than what you invested.

The taxation levels and bases, as well as reliefs from taxes, can change at any moment and depend on each individual’s circumstances.

Ross Whatnall

Ross Whatnall is CEO and co-founder of GSB and a highly experienced private client director. Ross holds many insurance and investment management qualifications, including CISI, CII, LIBF and CFA. He started his career in private banking with HSBC in the UK before moving to the UAE in 2013 to focus on serving his private clients.

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