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Pensions and Estate Planning

February 21th 2020 – Written by Jonathan Chorley

Pensions and Estate Planning

Since the Pension Freedom reforms of 2015, Defined Contribution or Money Purchase Pensions have become a key Estate Planning tool. The key Estate Planning benefits of this legislation include –

Less Tax

Flexible death benefits are now tax-free on death before 75; or taxed as the beneficiary’s income on death if over 75 (when/if income is drawn by the beneficiary).

More Choice

Any nominated beneficiary can now inherit pension wealth and retain it within a pension as a Flexi-Access Drawdown (FAD) fund that may be accessed whenever funds are needed.

Inherited drawdown flexibility 

Inherited drawdown now provides a flexible tool to transfer wealth down through the generations outside the scope of the Inheritance Tax (IHT) regime.


It is important to note that not all pension schemes are equal, and some may not have the flexibilities of the 2015 reforms built in, often due to the age of the scheme or the type of pension contract. However, such schemes or contracts may include valuable benefits such as Guaranteed Annuity Rates (GARs) that are typically not available anymore.

But how does this affect my retirement planning?

It is essential to take a holistic approach to the provision of income in retirement. Whilst a previous school of thought might be to draw an income solely from Flexi-Access Drawdown and retain other savings to pass on to beneficiaries; this may not maximise the tax efficiency of the wealth that has been accumulated.

By creating a strategy to draw a regular income from multiple sources, it may be possible to improve the tax efficiency of the funds in retirement and on death.

For example, this may take the form of drawing a regular income from Cash Savings and/or Stocks & Shares ISAs, neither of which will trigger an income tax liability. The use of Investments to fund regular income may also utilise Capital Gains Tax allowances that would otherwise go unused. This will hopefully see the value of the taxable estate for Inheritance Tax reduced.

Furthermore, by reducing the taxable pension income drawn, in line with Personal Allowances, the gross withdrawal rate falls and ideally allows a greater proportion of the Estate to be retained for the beneficiaries.

Much of course will depend on the income requirement in retirement, the assets available to fund this requirement and the product or tax wrappers in which these assets are held.

What can I do now?

It is important to check what death benefit options are available on any Pension Schemes in which you are enrolled and ensure that any nomination of benefits are up to date.

The creation and maintenance of a retirement plan should be considered an ongoing task as circumstances and legislation often change. 

If you have any queries, please do not hesitate to contact us.

EST. 1999