Your loved ones deserve to reap the benefits of your estate after your death, which is why inheritance tax can seem like a particularly cruel charge at a time of grief.

There are ways of reducing the tax burden, however, and a pension can play an important part in that.

What Type of Pension Should You Invest In?

If you are looking to use a pension with the intention of reducing your inheritance tax bill, then you should choose a defined contribution pension, like a SIPP. This type of pension can be inherited by a designated person at any age.

Although not subject to inheritance tax, It is worth noting, that any withdrawals from the inherited pension by your nominated beneficiary, will be subject to income tax at the recipients marginal rate if you die after the age of 75. If you die before this age, the money will be tax-free. The money must be designated within a two-year window.

How to Pass on Your Pension

Because it is not a part of your estate, there are some rules as to how you can pass your pension on. You should, of course, leave these details in your will. But you should also nominate a beneficiary to receive your pension on death, by completing a beneficiary nomination form. This is a very simple process and the form can be provided by your pension administrator and kept on file. You should ensure that this form is kept up to date.

Contributing to Family Pensions

Another clever way of reducing your estate and maximizing your family’s inheritance is to contribute to their pensions. There are caps on the amount you can pay in each year, and the other person will need to agree to the contribution. There are obviously many other considerations should you decide to do this, but it can be beneficial for both recipient and donor and is something to talk to your financial advisor about.