The recent changes around pensions mean they have become more attractive for your loved ones to inherit – which could prompt you to re-think how you approach your future.

Building up a large pot of pension savings could lead to a more fulfilling retirement – and it can now also provide a lasting legacy for your family. As part of the sweeping pension freedom reforms that were introduced in April of last year, the rules around inheriting a pension have been changed significantly, and it is something you might want your loved ones to benefit from.

Under the old rules, the tax charges around inheriting a defined contribution pension meant that your pot of money took a serious hit. If you had started to use your pension for a retirement income, or withdrawn a lump sum – or if you were aged over 75, and hadn’t used your pot to purchase an annuity – a 55% tax charge was applied, before your beneficiaries could inherit your remaining fund.

That was a huge amount that your family would miss out on receiving; and significantly limited the usefulness of this pot of money in shaping their future. Yet since April of last year, this rule has been abolished.

Now, if you die before you reach 75, your beneficiaries will not have to pay any tax to receive your pension, or to make withdrawals from it (regardless of whether you had started to use it). They will receive every penny that is left over, and can spend it at will, tax-free. This assumes the benefits fall within the member available lifetime allowance (otherwise there would be a lifetime allowance charge).

If you die aged 75 or older, your beneficiaries can also inherit your pension tax-free, providing they leave the money inside the pension wrapper. They would then only have to pay income tax at their highest marginal rate when withdrawing from the fund. In other words, this would mean they could be exempt from paying any tax at all depending on their status. The only exception is if you die before this April, and are over 75, as a 45% tax rate will apply, on withdrawals, up until that point. Nevertheless, this is still more favourable than the old rule of 55%.

This means you can leave your pension to your loved ones and they will pay little, if any, tax to receive and to use it. As your pension is not classed as part of your estate, it could also help if you have an inheritance tax liability (as it wouldn’t be included when totalling up the value of your assets). So you now have a real opportunity to leave some, or all, of your pension to your loved ones in a tax-efficient way.

The tax treatment depends on the individual circumstances of the investor and may be subject to change in the future.

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