Many over 55s have more than enough cash from their savings and investments without having to touch the money banked in their Qualifying Recognised Overseas Pension Scheme (QROPS).
The question for these savers is how to pass unspent money in a pension pot on to their families and loved ones.
Whether by accident or design, the British government has set up a slick, tax-effective strategy to shift money through generations with pensions – including QROPS.
Pension freedoms introduced in April 2015 along with an increase in inheritance tax (IHT) thresholds due in April 2017 combine to make a perfect storm for savers planning how to distribute their estate.
Pensions and IHT
For relatives or loved ones receiving the money, the gift is boosted as all unspent pension cash can be drawn as a lump sum with only the amount over the 30% tax-free lump sum subject to income tax in the place where the beneficiaries live.
That concession is even more generous if the pension saver had not turned 75 years old, when no income tax is due on the payment in the UK.
Pension payments to beneficiaries have been exempt from IHT since April 2015, provided the money is handed over within two years of the saver’s death.
The new IHT limit from April 2017 will trigger the phasing in of a family home allowance.
From then, couples can pass on their main property with an allowance of £100,000 which rises by £25,000 a year to £175,000 each in 2020-21.
IHT limit rises to £1m
Added to the £325,000 nil rate band for each spouse, this means a family home worth £350,000 and £650,000 of other assets can pass to children or grandchildren free of IHT on the death of the second spouse – making a total of £1 million.
IHT is applied to the balance of the estate at a rate of 40%.
Beware the thresholds taper off for estates worth more than £2 million.
Couples pay £140,000 IHT on a £1 million estate now, but from April 2020, when the new allowance has fully kicked in, this reduces to zero.
IHT for an individual falls from £70,000 to zero during the same period on an estate worth £500,000.