Inheritance tax risk from Govt pension fund

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Over four million people save with Nest - but unlike other pension funds unused savings might be at risk from inheritance tax Credit: PA

Millions of people saving into a Government-backed pension scheme are being warned their children may be forced to pay inheritance tax (IHT) on savings that are passed on.

One of the perks of saving into a pension is that unused funds are not counted as part of your estate on death, and so are exempt from IHT. Each individual has a £325,000 IHT limit – sums over that are taxed at 40pc.

However, Nest – which has more than four million members – was set up such that pensions form part of your estate. A spokesman for Nest said IHT will impact a “very small proportion” of its membership.

But Nest is expected to grow dramatically in size from April as a ban on transfers into the scheme is lifted. Due a special deal, annual charges for those transferring pensions in will be exceptionally low, at 0.3pc a year. 

Graham Peacock, of Salvus, a rival pension scheme, said: “It is completely inappropriate that members should face IHT whilst using a DWP-backed workplace pension.

“It completely flies in the face of industry-wide efforts to create a pensions landscape that is simple, transparent and trustworthy.”

Nest was created as a provider of last resort to support the government’s flagship “automatic enrolment” savings programme. This requires employers to contribute to a private pension on behalf of their staff. Nest is the largest of these providers. 

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