Inheritance Tax
When someone dies, the possessions they leave behind, including property, furniture, jewellery, shares and savings are all a part of their 'estate'. The estate also includes any debts that the deceased has accumulated. It may be possible to bequeath money from some of your pension schemes to your survivors.
It is not possible to bequeath your State Pension; when you die, your state pension dies with you. Your National Insurance record can however be used to provide your surviving partner with a basic State Pension if appropriate; for more information see Pensions and Bereavement. It may however be possible to inherit some of your partner's State Second Pension when they die; for more details see Inheriting State Second Pension.
If you are a member of an occupational defined benefit scheme, your annual benefits will usually die with you. However, you may be able to nominate someone to receive a lump sum payment from your scheme in the event of your death if you were not already receiving your benefits. A money purchase scheme will usually pay out the total value of your pension fund to a nominated survivor or to your estate in the event of your death prior to retirement.
If you die when you are already drawing your pension benefits, your survivors will only receive money if you chose a retirement income option which facilitates inheritance. If you are under seventy-five when you die, your survivors will usually be entitled to a payment if you opted for income withdrawal or purchased an annuity which guaranteed a payment to your estate. If you are over seventy-five when you die, your survivors may be eligible for a payment if you had opted for income withdrawal. These payments will be subject to specific tax rules. If however it is considered that you aimed to avoid inheritance tax with your retirement income option, these payments will be subject to inheritance tax. For more information on these themes see Pension in the event of a Death.
Your survivors may be required to pay inheritance tax on your estate. Any assets that belonged to you when you died count towards your estate, and the total value of your estate will be the value of these assets minus any outstanding debts. Inheritance tax is only paid on the value of your estate which exceeds the inheritance tax-free band. This band is set at £312,000 for the tax year 2008-2009. If your estate exceeds this then the excess is subject to inheritance tax at a rate of forty percent. However, if your estate passes to your wife, husband or civil partner and you were/are both UK residents, there will be no inheritance tax to pay. When you make a last will and testament you can nominate someone to oversee the division of your estate: this person is known as your executor. It is the responsibility of the executor to ensure that any inheritance tax owing on your account is paid, or alternatively that the necessary forms have been completed to prove that your estate was exempt from inheritance tax.
