In her Autumn Budget 2024 speech, Chancellor Rachel Reeves revealed the decision to include unspent pension pots in the scope of inheritance tax (IHT) starting from April 2027. This change poses significant challenges for families.
While pensions were previously exempt from IHT considerations, families will now need to ensure they have sufficient liquidity to cover tax liabilities.
The expectation is that pensions will cover the IHT due, but this may not be practical depending on the assets held. Families may need to adjust their life cover policies to account for these potential liabilities linked to pension values.
The changes raise pressing questions regarding the use of gift reliefs for distributing pension assets before death.
IHT and pensions: avoiding hasty decisions
When looking at funding retirement, families may be more inclined as a starting point to “switch on” their pensions to fund retirement.
Beyond this, it’s essential to carefully consider any changes to pension arrangements and seek appropriate financial advice, as the best approach will vary from person to person.
Pensions and tax efficiency
With pensions now impacted by IHT, many will be looking for alternative tax-efficient savings or investment vehicles for estate planning.
The key point here is that pensions remain tax efficient. The loss of exemption is a blow but was expected at some point given the lifting of the lifetime allowance by the previous UK Government.
There may be a shift in mindset for those individuals who perhaps have pensions but were avoiding utilising them where they had sufficient wealth outside the pensions to fund their day-to-day lifestyles and these pension pots were seen as a way to pass a valuable asset down to their children.
We shouldn’t forget, however, that the most valuable aspect of pensions is the gross tax-free roll-up of income and gains on the investments within them. Mathematically, the impact of this over the long term is still hugely valuable.
There will be a consultation period where the industry will be able to voice their concerns regarding the practical application of the new rules.
How we can help
Our specialists in inheritance tax, pensions, estate planning and wealth management are experienced at helping individuals and families on the most tax-efficient ways to preserve their wealth and pass it between generations.
Get in touch for expert help in understanding the implications of the announced changes, and developing a tailored plan to address them.