How your pensions could help you pass more wealth to your loved ones

Your financial plan helps you build wealth for the future and you will likely use a large portion of your savings to fund your lifestyle in retirement. However, you may also think about the wealth you want to leave behind for your loved ones.

The money that you pass on to the next generation can help them achieve their financial goals and build a foundation for their own retirement savings.

Unfortunately, if you don’t plan for wealth transfer, your family could lose a significant portion of your estate to Inheritance Tax (IHT).

IHT receipts are on track to “break all previous records”

The number of people paying IHT has been rising steadily in recent years. According to FTAdviser, forecasts suggest that HMRC will raise £7.6 billion from IHT in the 2024/25 tax year.

This is a significant increase on the record-breaking £7.1 billion raised the previous year.

IHT receipts are likely rising because the “nil-rate band” – the amount that you can pass on without triggering a tax charge – remains frozen until at least 2028.

In 2024/25, your nil-rate band is £325,000 and you may benefit from an additional £175,000 “residence nil-rate band” when passing your main home to a direct descendant such as a child or grandchild.

Your spouse or civil partner can also inherit your estate without paying IHT and may also benefit from your unused nil-rate bands in addition to their own. This could mean that you could pass on up to £1 million between you.

However, the nil-rate bands are frozen until at least 2028. Meanwhile, the value of your estate could increase as house prices rise and you may see growth on your savings and investments. This could mean that more of your wealth exceeds the nil-rate bands, so your family may pay more IHT.

There are several ways to potentially mitigate IHT including lifetime gifting or trusts. Yet, many people overlook pensions and how useful they can be in estate planning.

62% of Brits are unaware that their pension normally sits outside their estate

Your pension is a useful vehicle for retirement saving as you benefit from tax relief and may receive employer contributions. It’s also an overlooked tool for mitigating IHT and potentially passing more wealth to your loved ones.

This is because your pension typically sits outside your estate and isn’t included in IHT calculations.

Unfortunately, according to Pension Bee, 62% of Brits are unaware that wealth in their pension won’t normally count towards their nil-rate bands.

Usually, if you die before 75 and pass your pension to your beneficiaries, there is no IHT to pay on those funds. Your beneficiaries are free to keep the pension savings invested in the current scheme or transfer them to another provider.

They won’t normally pay any tax when accessing the funds in your pension either.

However, if you die after 75, your beneficiaries may pay Income Tax at their marginal rate when taking a lump sum or drawing an income from the inherited pension.

Despite this, passing wealth in a pension may still be tax-efficient as it could help you reduce the IHT that your family pays.

If you are concerned about the IHT that your family may pay on your estate, you could consider increasing your pension contributions. This may have the added benefit of reducing your taxable income, so you could mitigate Income Tax while you are alive too.

It may be useful to seek professional advice to explore the most tax-efficient ways to hold and pass on wealth to loved ones.

You may need to fill out an “expression of wish” form

When creating an estate plan, you may need to give instructions to your pension provider about who should inherit any remaining funds when you die.

There are typically two options here:

  1. Discretion

    You may need to fill out an “expression of wish” form to nominate your chosen beneficiaries. Your pension provider is not obligated to follow your instructions, but they normally will, where possible.

    If you don’t nominate a beneficiary, your pension provider will choose one themselves but their decision may not necessarily align with your wishes.

    When you choose the “discretion” option, your pension does not count towards your nil-rate bands when the executor of your estate calculates IHT.
  2. Direction

    This option is less common but some pension providers allow you to choose a beneficiary and they are obligated to pass any remaining funds to that person.

    However, in this case, the pension will form part of your estate and there may be some IHT to pay on it.

    It might be useful to seek professional advice to determine the most tax-efficient way to pass your pension on to loved ones.

You can pay into somebody else’s defined contribution pension on their behalf

If you want to transfer wealth to your loved ones now, consider contributing to their pension.

These contributions are subject to the normal gifting rules. In the 2024/25 tax year, you have an IHT “gifting annual exemption” of £3,000. Any gifts up to this amount will automatically fall outside your estate.

Any further gifts will normally fall outside your estate provided you survive for seven years after giving them.

You may also be able to make more regular contributions under the “gifts from income” rules. You can make as many of these gifts as you like provided they:

  • Are regular
  • Do not affect your standard of living
  • Come from your income and not other sources, such as your savings or investments.

Any third-party pension contributions are treated as if the person has paid the money in themselves, so they still benefit from tax relief at their marginal rate of Income Tax. Additionally, they might generate growth on their pension savings over time.

As such, contributing to their pension could be more valuable than giving them a cash gift.

Bear in mind that any contributions count towards their pension “Annual Allowance” – the total amount they can contribute to their pension each year without triggering a tax charge – of £60,000 (or 100% of their earnings) in 2024/25.

If the recipient doesn’t have an income, you can contribute up to £2,880 to their pension.

Paying into your loved ones’ pensions could be an effective way to pass on wealth while you are alive. Yet, the rules can be quite complicated so you may want to seek advice first to ensure you are being as tax-efficient as possible.

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For more information on how your pensions could help you pass more wealth to your loved ones, get in touch or email us at

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning 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.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Posted in Financial Planning.