Saving money for your pension will have some benefits for you and your families, including tax relief from the government and compulsory contributions from the employer. When you have enough savings on your account, you can have enough retirement income in your retirement period.
A pension fund can also take care of your family after you are gone. It will protect your savings and also reduce the amount of inheritance tax that your families need to pay in the future. You must learn how pensions can help you protect your assets from this type of inheritance tax.
What is the inheritance tax?
When you die, some of your beneficiaries (you can decide who will receive your assets) will be charged the inheritance tax for any items in your estate, for example, money, property, and other belongings.
The total of this inheritance tax from the government will be different from one person to another one. It depends on many factors, such as the estate value, who the beneficiaries are, etc. You need to check all the details from this tax, so you can prepare everything for helping your beneficiaries. You also need to know how the inheritance tax works.
How does inheritance tax work?
Before you learn about how the inheritance tax works, you also need to know the standard threshold for this tax. The standard threshold for this tax is $325,000. If your assets are less than this threshold, your beneficiaries will never be charged on this tax. When your estate is more than this threshold, but you leave the assets to your spouse, a charity, or civil partner, the inheritance tax will not apply to your asset.
However, when you have a large asset and you decide to not give it to your spouse, charity, or civil partner, you are going to have about 40% of the inheritance tax charged on your assets that are above the threshold of $325,000. Here are some examples of the calculation.
– If your asset is worth $250,000, no inheritance tax will be charged because it is lower than the threshold.
– If your asset is worth $500,000 and you are going to leave it to your spouse, this asset will be free from the inheritance tax.
– If your estate is worth about $500,000 and you decide to leave it to your friend, the inheritance tax will occur. The estate value has $175,000 more value than the threshold. The rate of the inheritance tax will be 40%. Therefore, the tax charged will be $70,000.
You need to learn how you can calculate the inheritance tax for your estate. You can use the inheritance tax calculator that is available on the Internet, especially when you want to calculate the total amount of tax that will be paid based on your estate. This calculator will help you get the right amount of tax from your estate immediately.
How Pensions Can Help You Protect Your Assets from Inheritance Tax?
Unlike cash saving accounts, pensions are going to sit outside your estate. Therefore, they will not count towards the inheritance tax threshold after you die. Because of this reason, pensions are the best way for leaving money to your families or relatives without having to deal with expensive inheritance taxes. Your beneficiaries will keep as much money as possible.
Inheritance tax for the defined contribution pensions
If you have a defined contribution pension, such as the pension offered by PensionBee, it is very easy for you to pass your savings to all of your beneficiaries immediately. When you die before age 75 and you haven’t withdrawn your pension, the beneficiaries will have 2 years to claim the entire asset without having to pay the inheritance tax.
If you are older than 75 years old when you die, the defined contribution pension will never be subject to this type of inheritance tax. However, the beneficiaries still need to pay the income tax at the usual rate.
Inheritance tax on the drawdowns pensions
If you have already started getting access to your pension via drawdown, your beneficiaries can access your estate as a tax-free asset. They can have an option to receive the drawdown payment without having to pay the inheritance tax. They can also choose to use the money they get for buying an annuity and they don’t have to pay tax on any money they are going to receive.
Passing Down Your Pension
For ensuring that your pension can go to your loved ones without having any hassles when you die in the future, you may want to follow some of these steps.
a. Consider having a defined contribution pension. It will give flexibility to all of your beneficiaries
b. Transfer all of your old workplace pensions into one pension scheme. It will make things easier for your beneficiaries. You also need to ensure that they have access to all of the pension savings
c. Keep the information updated. This is another important thing that you need to do. You should notify the pension provider about your beneficiaries. The information must be updated regularly.
d. You can consider creating a will, so you can remove any doubt when your beneficiaries are going to divide your estate. They will respect your wishes after you die by looking at this will.
Are you looking for the best ways to transfer your assets to your beneficiaries without any hassles? You can consider investing in some pension accounts. Pensions are very useful to help you protect your assets from the inheritance tax after you die. You can consult with professional financial advisers who are ready to help you manage your pension professionally.
Some of them will be able to give advice to you, especially when you want to have pensions for your beneficiaries after you die. Don’t forget to tell everything to your beneficiaries, so they will be ready with all procedures for claiming your estate. They should understand the whole procedures for getting your estate and some related taxes that they are required to pay.