Reducing inheritance tax can be fun – marrying the one you love, giving money to your family, supporting charities – but one way is often overlooked. Paying money into a pension takes it outside your estate, so whatever is left when you die can be passed to your relatives without using any of your inheritance tax allowances.

Advertisement

To do that, you simply choose who you want to receive any remaining funds when you die, then tell the firm that manages your pension. For example, you could nominate your partner (you don’t have to be married) or your children, giving their full names and dates of birth as you would in a will.

Calculate how much more income you could get instantly by using our online annuity calculator.

Once done, there is no need to mention your pension in your will. This nomination means the money in the pension fund will not be part of your estate when Inheritance Tax (IHT) is calculated. Of course, most estates – about 19 out of 20 – are not subject to IHT, anyway. They are either below the thresholds – which can be as high as £1 million for widowed homeowners – or they pass entirely free of tax to a spouse or civil partner. But if you fear that rising house prices mean your heirs will have to pay IHT then putting money into a pension pot can be a way to bring their bill down.

Remember, though, that money you put into a pension fund is not easy-access. Once you are 55, you can take a quarter of it out tax-free, but the rest will be taxed as income.

Free guide to saving Inheritance Tax

There are limits on what you can pay in to a pension fund, too. If you’re under 75, you can pay up to £60,000 each year. You can’t normally put more in than you earn, but if you earn very little or nothing then you can put in up to £3,600 – both amounts include basic-rate tax relief.

More like this
Advertisement

If you die at 75 or older, the recipients can keep the money in a pension fund of their own and only when they take money out will it be taxed as income. If you die under 75, the recipients can take the money and spend it without paying tax at all – though that generous rule may be changed in the future, as may the limits on how much you can put into your pension.

Advertisement
Advertisement
Advertisement