April 2015 marked revolutionary pension changes which enabled pensions such as personal pensions and SIPPs the option to be passed on down the generations and on to any named beneficiary. Significantly, this legislature now enabled to option of passing on a pension regardless of whether they are a relative or not. If you are the beneficiary of a pension or are looking for information on how to pass down your pension in a tax efficient manner, there is much to be aware of.

What should you do with your pension now it can be passed on?

The first step is to choose a beneficiary and then tell your pension provider who you have chosen to benefit from the pension. You can nominate more than one beneficiary. This is typically prepared through an ‘Expression of wish’ form, which although not legally binding, it will notify the pension scheme trustees of what you would like to happen.

Next, find out if your pension can be accessed as a nominee’s drawdown pension. This keeps the pension invested and allows you to dip into the pension when you wish. Some personal pensions will not allow funds to be accessed in this way, so a transfer could be considered to a pension that does. This cannot be transferred after death, which is why it is important to consider independent financial advice about a transfer, as some pensions have valuable features that could be lost on transfer.

If you buy an annuity with your pension, the money cannot be passed on to the next generation in a tax advantaged pension environment. The exceptions to this are an annuity with value protection, or a joint life or a guaranteed payment period, where the annuity will be paid until the end of that period.

Remember, if you do not intend to draw on your pension but want to pass it on to your beneficiaries, look at the funds it is invested in. Some ‘lifestyling’ funds are designed to automatically reduce risk in the 5-10 years before retirement, after this the pension investor is then expected to buy an annuity. If you are considering leaving your pension for future generations, leaving it in potentially higher returning investments may be a better strategy.

What are the potential pitfalls on passing on your pension?

If you have the option of drawing capital or income from a pension but chose to defer doing so under the new freedoms, perhaps with a view to passing your tax-exempt fund to your next generation (or not having it lost in long term care costs), it is possible that the local authority could argue that you have ‘deliberately deprived’ them of this money and as such demand access to it. Therefore, such pension capital could be included in the assessment of eligibility for funding support from the government for long-term care costs.