- Most modern workplace and personal pensions don't fall into your estate for IHT purposes
- Some older style pensions may be liable to IHT if you pass them onto beneficiaries
- There are things you can do to take them out of your estate
If you save money into workplace or personal pensions such as a self invested personal pension (Sipp), you can pass these pots on to beneficiaries after you die free of inheritance tax (IHT), making them a good way to pass on wealth if you do not need the assets within them to fund your retirement. But there are some instances where pensions are not free of IHT.
A key determinant of whether pensions fall into your estate is how the beneficiaries – the people to whom a lump sum payment or death in service is passed onto after your death – are selected. This is the case for both defined-benefit (DB) and defined-contribution (DC) pensions. To be IHT free, the pension's beneficiaries should be selected on a discretionary basis by the scheme administrator or trustee, and it should pay out the proceeds paid out within two years of being notified of the death. This is usually the arrangement with most modern pensions. But nominations which confer a contractual right to a payment to a named person are usually part of your taxable estate.