In principle, pension and life policies can count as assets for the purposes of estate valuation. However, as you might expect, there are plenty of exceptions to the rule, and many ways in which your affairs can be managed so that they do not fall within your estate, thereby reducing your tax liability.
Lump sum payments under life policies and pension plans are usually written in trust. Where this is the case, it means that any such lump sums arising as a result of your death will be held by the trustees of the policy or plan, for the benefit of the individual nominated to receive it. The trustees will be able to pay the lump sum to the nominated individual once presented with your death certificate. In this context, the lump sums do not form part of your estate.
Similarly, if your employer provides a death-in-service benefit as part of your wider benefits package, they will usually pay this directly to the nominated individual upon your death. This sum will not form part of your estate.
The value of your pension fund as at the date of your death will not form part of your estate for inheritance tax purposes. However, anything which you leave in your will that was originally part of your pension fund will form part of your estate.
It isn’t all that simple, though. Whether your pension pot is taxable may depend on whether you have reached the age of 75 when you die, and whether the beneficiary chooses to take the pot as a lump sum or in order to pay for an income for themselves.
New rules in place from April 2016 affect the tax situation for people who benefit from the pension of a person who dies aged over 75.
Pensions are important, and can be complicated. You should take specialist professional advice as to the effect that your own pension will have on your affairs and your loved ones when you die.
For more information on inheritance tax, see our section Inheritance tax.