The over 50s are increasingly looking to avoid inheritance tax by passing on their unspent pension savings when they die.
A quarter have plans to pass on their lifetime savings to friends or relatives – but an alarming number do not know how inheritance rules affect their estates.
With an average pension pot of £51,000 to leave, financial experts are urging the over 50s to take professional estate planning advice.
Along with the right to withdraw cash from a pension for the over 55s to spend how they like, the government also introduced a slew of rules to help retirement savers pass on unspent pension money to anyone they wish.
Research from Saga Investment Services reveals that one in four over 50s with a defined contribution pension hoped to leave an average 56% of their pension savings to a loved one.
However, many were confused about the rules and how they should leave the money so the right person inherited.
The new rules allow someone under 75 years old to pass on their unspent pension fund free of tax, which was picked up by only 18% of the over 50s interviewed.
If someone is gifted the unspent pension of someone over 75, the tax due depends on the income tax rate of the person receiving the money.
Just over a fifth (22%) believed that only a spouse could inherit a pension.
Few knew that they could direct their pension provider to pass the funds to a nominated person if they completed an ‘expression of wish’ form and lodged the document with the pension provider.
Gareth Shaw, head of consumer affairs at Saga Investment Services, said: “Thanks to the changes made last year, pensions have become a far more attractive way to pass on your wealth and bypass Inheritance Tax (IHT).
“Typically, pension savings are ring-fenced from IHT, and therefore people could be left significant sums either paying a lower amount of tax or no tax at all, depending on their income and the amount they inherit.
“However, there’s a balance – the desire to pass on money from a pension should not overpower the need to have financial comfort in retirement. With any inheritance tax planning, professional advice is essential to help get that balance right.”