One of the key announcements in the recent Autumn Budget was that starting in April 2027, Inheritance Tax (IHT) will apply to pension assets.
This is a significant change that could greatly affect our retirement and estate planning. Let’s explain what this means.
What’s changing?
Pensions have been a great way to pass on wealth to the next generation without paying inheritance tax. Since the pension freedoms started in 2015, many people have used their pensions not just for retirement income but also to leave money to their loved ones in a tax-efficient way.
However, the government thinks that pensions are now being used more for inheritance tax planning rather than their main purpose. This is funding retirement. To address this, starting in April 2027, most pension death benefits will count as part of your estate for inheritance tax purposes.
How will this work?
Here are the main points based on what we currently know about the new rules:
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Spouses and Civil Partners: If you leave your pension to your spouse or civil partner, they won’t have to pay inheritance tax on it. Dependents’ pension schemes are not included in inheritance tax.
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Other Beneficiaries: If your pension goes to someone else, like your children or grandchildren, the value of your pension will be counted in your estate for inheritance tax calculations.
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Double Taxation After Age 75: If you die after age 75 and your pension goes to someone who is not your spouse, they may have to pay both income tax on withdrawals and inheritance tax. This can reduce the amount they receive.
Why Does This Matter?
In the past, pensions were a smart way to pass on wealth without paying much tax. Now, changes mean:
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Higher Tax Bills: Some pensions could hit a tax rate of up to 90% because of income tax and inheritance tax combined.
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Focus on Retirement: Pensions will mainly be for your retirement, not for passing down to heirs.
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Effect on Singles and Couples: Singles or those living with a partner (without being married or in a civil partnership) may be more affected, as they won’t benefit from the spouse exemption.
Potential Complications
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Delays in Accessing Funds: Beneficiaries may face delays in receiving pension funds because they need to calculate and pay any inheritance tax owed.
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Administrative Burden: Executors and pension trustees will have more paperwork, which may slow down the entire process.
What Can You Do?
While this might seem overwhelming, there are steps you can take:
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Review your retirement plan: Make sure your pension meets your retirement needs.
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Consider life insurance: Life insurance can provide a lump sum to your beneficiaries to help cover any inheritance tax.
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Use gifting allowances: Giving regular gifts to family members can lower the value of your estate over time.
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Look into other investment options: ISAs can be passed on to beneficiaries and might offer tax benefits.
These changes aim to encourage people to use pensions to provide income during retirement. The government wants to make the system fairer. However, higher earners with large pension funds need to rethink their estate planning.
I understand these changes may give you concerns about your finances and the legacy you want to leave. Good financial advice can help you navigate these new changes. We can work together to understand these challenges and ensure your retirement and estate plans align with your goals. If you have questions about how the new rules might affect you, please reach out. You can schedule a free, no-obligation chat here.
