The landscape of retirement and inheritance planning is on the brink of a major shift. While the 2024 Budget’s headline changes focused on National Insurance, a quiet but significant reform is set to introduce a new layer of complexity: the inclusion of defined contribution pension pots in inheritance tax (IHT) calculations from April 2027.
For years, pensions have been a powerful tool not just for funding retirement, but also for wealth transfer. Under current rules, a pension can be passed on to beneficiaries largely tax-free if the owner dies before age 75. If death occurs after 75, beneficiaries pay income tax on withdrawals at their marginal rate. This has made pensions an excellent vehicle for intergenerational wealth.
This is all about to change. Subject to ongoing consultations, the new regime will likely treat your pension pot as part of your taxable estate. This could lead to a double taxation scenario, where your heirs may face both IHT and income tax on inherited funds.
This change also complicates the use of the Residence Nil-Rate Band (RNRB). The RNRB offers an additional IHT-free allowance of up to £175,000 per person, but it is reduced for estates valued over £2 million. With pension assets now included, many more estates could exceed this threshold, potentially losing this valuable relief and facing a larger IHT bill.
Proactive Planning is Key
Despite this challenging outlook, proactive planning can mitigate the impact. The core strategy is to shift from viewing your pension as a static asset to a dynamic tool for wealth transfer.
Consider these strategies to safeguard your legacy:
Make Lifetime Gifts:
Instead of waiting to pass on your pension as a death benefit, you can make gifts now. For instance, you could withdraw a portion of your pension—especially the tax-free lump sum—and place it into a trust or gift it directly to your heirs. This starts a seven-year clock, after which the gift falls out of your estate for IHT purposes.
Prioritise Spousal Inheritance:
Assets passed to a surviving spouse or civil partner are exempt from IHT. Nominating your spouse as the primary beneficiary of your pension can be a crucial first step, leaving other assets to be distributed elsewhere in your estate.
Utilise Whole of Life Assurance:
A whole of life assurance policy can be set up in a trust to pay out a sum on death specifically to cover a future IHT bill. This ensures your heirs have the funds to settle the tax without needing to sell other assets. The funds from the trust are immediately accessible without waiting for probate.
While these changes introduce new hurdles, they also highlight the importance of expert tax advice. We at MaxPro Accountants and Tax Advisers can help you navigate these complex rules and create a robust plan to protect your legacy.
Don’t let these changes leave you unprepared. Take control of your financial future and ensure your wealth benefits your family, not the taxman.
Contact Us HERE today for your FREE initial consultation