Using pensions and equity release could offer people a better inheritance

Alice Watson

May 17, 2019

Alice Watson (pictured) is head of marketing and communications at Canada Life

Inheritance tax (IHT) receipts have boomed in the last decade. Forecasts show the Treasury was expected to take £5.5bn in death duties in 2018-19, more than double the £2.4bn raised in 2009-10.

This increase is largely thanks to rising house prices, which have taken more estates over the IHT threshold. But many families hit with unwanted tax bills after loved ones have passed away may have been left wondering if there’s a better way forward, to ease the financial pain and inconvenience of having to pay away a chunk of the estate that had been left to them.

For some families, there may be a solution – and one which involves equity release too.

One of the lesser known provisions within the pension freedoms – which marked their fourth anniversary in April – made pensions far more efficient as a wealth vehicle in inheritance planning. Before April 2015, most types of private pension didn’t count towards someone’s estate for IHT purposes, but any unused savings in them were taxed at a punitive 55% rate when passed on.

Thanks to the freedoms, pensions passed on are now taxed at the marginal income tax rate of the heir receiving them, tax-deferred if the heir keeps it in a pension rather than drawing on it, or aren’t taxed at all if the benefactor dies before 75.

Drawing less on their pension, and instead drawing on their other assets to fund retirement, could allow someone to leave more money to their loved ones. For many retirees, their property will be one of the most valuable assets they own.

Tapping into its value through equity release, while allowing pension savings invested in a drawdown product or a self-invested personal pension to continue accruing in value, could let people leave a larger amount to their beneficiaries at a lower tax rate.

Most advisers are well aware of this. However, few among the general public are aware of the value of reversing the typical ‘spend the pension, save the property’ approach to inheritance planning.

In research Canada Life conducted for our recent report, ‘How do pensions and property best fit into your clients’ retirement and estate planning?’, we found just one in three (33%) over 55s say they are aware of the IHT changes within the pension freedoms.

These changes offer a significant opportunity for many families to reduce the tax burden on their estates – and for advisers to demonstrate the value of advice. The challenge for advisers will be to overcome the emotional attachments to homes that frequently come up when equity release is broached.

For many of those who stand to benefit, this reluctance to treat their property as a source of wealth is often all that is holding them back from making the most of the pension changes.

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