▶ The Autumn Budget revealed significant changes to Inheritance Tax (IHT), signaling a shift in the Government's stance on existing IHT reliefs, particularly targeting pension reliefs. Pensions have long served as a valuable tool for tax planning, offering relief on contributions and historically providing a tax-efficient strategy for inheritance tax.
▶ Until now, pensions were often excluded from an individual's Estate at death, making them a key component of inheritance tax planning. However, the new rules set to take effect in April 2027 will alter this landscape. Unused funds within a pension scheme will now be included in an individual's Estate, subjecting them to IHT.
▶ The impact will be felt across various pension schemes, affecting both defined contribution and defined benefit (DB) pensions differently. While the calculation for defined contribution schemes is straightforward due to the defined fund amount, DB schemes will now see death benefits included in the Estate, posing new challenges for beneficiaries.
▶ Despite these changes, transfers to a spouse upon death remain exempt from inheritance tax under the spouse exemption. However, the potential for a high marginal rate on the remaining pension pot raises concerns about double taxation and the depletion of pension funds during one's lifetime.
▶ To mitigate the impact of these IHT changes on pensions, individuals are encouraged to assess their options before the 2027 implementation date. Drawing down pension funds to generate surplus income for gifting, following established rules, can offer immediate IHT exemptions. However, it's crucial to consider the income tax implications of pension withdrawals and evaluate individual circumstances to determine the most suitable course of action.
▶ Acting promptly to review your pension strategy and adapt to the forthcoming changes is essential to navigate the evolving landscape of inheritance tax planning effectively.
I am an Independent Financial and Mortgage Adviser and have worked in Financial Services for over 12 years. During my career I gained experience in assisting both individual and corporate clients.…
