2 important reasons to think carefully about who will inherit your pension pot

Although it may feel difficult to consider the eventuality of your passing away, it’s crucial to have a detailed estate plan in place that lays out your intentions clearly and fairly.

“Estate plan” describes your intentions for who will inherit your wealth when you die, including your cash, investments, property, and pensions.

In the case of your pension wealth, this is likely to be one of the most valuable assets you possess – but many people don’t think about it when putting together their estate plan.

In part, the common omittance of pensions in estate plans could be because many believe that most or all of their pension wealth will already be depleted by the time they pass away. Yet there is no guarantee that your pension will be empty by the time you die.

What’s more, there are significant tax benefits to leaving pension wealth behind for the next generation – so including it in your estate plan could be helpful to your loved ones later on.

Here are two reasons to think carefully about who will inherit your pension pot, plus how we can help you form a comprehensive estate plan that offers ultimate peace of mind.

1. You may need to take extra steps when offering a pension as inheritance

Firstly, it is important to note that unlike your other investments, properties, and cash, it may not be enough to simply bequeath your pension to a certain person or people in your will.

While a will is a legally binding document, you usually need to take an extra step when leaving a pension as inheritance: filling in an “expression of wish” form.

Remember, your pension is usually invested and managed on your behalf by your pension provider. As such, your expression of wish form lets them know who should receive the funds upon your death.

The form will usually require:

• Some basic details, such as your National Insurance number
• The names and addresses of your intended beneficiaries, as well as your relationship to them
• The percentage of your pension you wish to leave to each beneficiary. Seeing as the value of your pension may fluctuate over time, giving a percentage rather than a figure allows your pension provider to divide the funds evenly.

All this means that your pension is not automatically transferred to your next of kin upon your death, but instead is allocated to the person or people you would prefer to receive it.

If you have already completed an expression of wish form with each of your pension providers, it’s important to keep updating this as you go through life.

For instance, if you have divided your pension among your grandchildren, and your family welcomes another grandchild, you may need to amend your forms in order to include them fairly.

2. Pensions do not usually attract Inheritance Tax

Perhaps the most essential reason to think carefully about who will inherit your pension wealth is because pensions don’t usually attract Inheritance Tax (IHT).

As of the 2024/25 tax year, you could leave up to £500,000, if this wealth includes your home, to children or grandchildren without an IHT bill being due. Wealth above this bracket could be subject to IHT at a rate of 40%.

On the other hand, you could leave as much pension wealth as you like without this sum contributing towards your family’s IHT liability. While this rule is subject to change in the future, for now this means you could utilise your pension to improve your family’s tax efficiency overall.

Upon learning that pensions don’t usually attract IHT, you may wish to pay closer attention to who will inherit the money in your pension when you die.

Some helpful tips to get started are:

• Form a comprehensive estate plan that holds IHT as a priority
• Discuss your intentions with your beneficiaries
• Complete an expression of wish form, or forms, with your pension providers
• Talk to a financial planner about IHT and estate planning before you act.

By keeping all these elements in mind, you could design your estate plan around your pension, using it as a tax-efficient vehicle to pass as much wealth as possible down to the next generation.

Get in touch

As independent financial planners, we can guide you through forming an estate plan that uses all the available vehicles to reduce IHT.

We can also talk you and your family through the process of readying your finances for later life, ensuring total financial peace of mind for your loved ones.

Email enquiries@prosserknowles.co.uk or request a callback from one of our advisers.

Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, will writing, or tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.