Pensions just became an even better way to avoid inheritance tax

Aside from the ridiculous quirk described above, pensions are indeed free of death duties. And that is why any financial adviser or accountant worth their salt will tell you to touch your pension last of all. Unlike cash and Isas, a defined contribution pension or Sipp does not count as part of your estate.

If the pension holder dies before the age of 75, no tax is due at all. Otherwise, the recipients will just pay income tax at their marginal rate. In the case of grandchildren, this may well be the attractive rate of 0pc, so long as they limit withdrawals to their “personal allowance” – £12,500 in this tax year.

This perk is one of the reasons behind the success of Mr Osborne’s “pension freedom” reforms, which tore up the rule book and allowed unheard-of flexibilities. Since April 2015, anyone aged 55 or over can spend their pension how they like, be that buying an annuity, leaving it invested and “drawing down” an income, or cashing it in all in one go, or several.

This partly explains the billions of pounds that have left “final salary” schemes – which do not benefit from the reforms – for personal pensions over the past five years. 

Giving up the guaranteed, inflation-proof income of final salary pensions is not to be taken lightly. There is no going back – once the toothpaste is out of the tube, you won’t get it back in. With careful planning, however, your pension does not have to die with you. It can enrich generations to come.

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