The Chancellor’s Autumn Statement announced that starting in April 2027, money in a pension might be subject to Inheritance Tax (IHT).
As a result, more parents are wondering if they should withdraw some tax-free cash now and give it to their children instead. If done correctly, it can be a good decision. If done incorrectly, it can harm your retirement savings and result in unexpected tax bills. Here’s a simple overview.
Why could it make sense?
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Kids receive money when they need it: A single payment can assist with a house deposit, starting a business, or paying school fees; expenses that can’t wait for an inheritance.
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Gifting money can reduce your inheritance tax (IHT) bill: Each pound you give away is deducted from your taxable estate. If you live for seven years after making a significant gift, it usually won’t be subject to IHT.
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You control your withdrawals: Decide how much and when to take. If you take a small amount, it won’t be taxed as per pension laws.
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You can give away up to £3,000 each year without any inheritance tax: If you didn’t use last year’s allowance, you can add it to this year. For bigger gifts, some planning is necessary.
Why might it not make sense?
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A reduced pension means a lower income in retirement: Once the money is gone, it’s gone. Ensure your retirement budget is still sufficient.
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Possible future taxes: If you withdraw cash tax-free and invest it in your child’s name, any income or profits might be taxed to them (or to you if they are very young).
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Rules can change: The IHT adjustment is scheduled to start in 2027, and future Budgets may introduce additional changes. Stay adaptable and be aware of potential changes.
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Keeping accurate records and adhering to deadlines is crucial for large gifts: You should maintain a clear paper trail to document your intentions. It’s also essential to coordinate with your adviser and pension provider.
Giving gifts from your pension can be an excellent way to allow your children to enjoy the savings you’ve worked hard for while you’re still around. However, it’s crucial to ensure that this doesn’t jeopardise your future or create unexpected tax issues.
Consider the advantages and disadvantages, calculate the details, and discuss with an expert in pensions and estate planning. If you would like a second opinion or someone to bounce ideas off, please don’t hesitate to get in touch with us. We’re here to help you make a well-informed decision.
If you need advice, we’re here to help. Schedule a free, no-obligation chat here. A guide on selecting a financial advisor is also available here.
This blog is for information only and does not constitute personalised investment advice. Past performance is not a reliable indicator of future returns, and the value of investments can fluctuate, falling as well as rising. Tax rules can change and depend on individual circumstances.
