John Benson
Head of Department, Partner
Recent government proposals may soon change how unused pension funds and death benefits are treated when someone passes away, potentially exposing more families to inheritance tax (IHT). This could have a significant impact on estate planning and wealth preservation.
Under the new proposed rule changes, any unused pension assets will be included in your estate for IHT calculations. This will include self-invested personal pensions or death benefits from defined benefit pensions.
The responsibility for reporting and settling any IHT owed on unused pension funds and death benefits will rest with the pension scheme administrators. We expect that the government will provide further clarification on what this will entail, but it is likely to mean that your executors will need to provide information to the scheme administrators in order for them to calculate the IHT due.
Those who have saved diligently into their pensions may find themselves facing unexpected tax consequences. Currently, married couples or civil partners can pass on up to £1 million tax-free. Taking into account allowances. However, once pensions are counted toward the taxable estate, that threshold can be breached quite easily, especially when combined with other assets such as investment properties, ISAs and savings. As a result, families may find themselves caught in the IHT net despite prior planning.
One major concern is the potential for a “double taxation” scenario. At present, when someone dies before the age of 75, pension beneficiaries can inherit pension assets free from income tax. After 75, withdrawals are taxed at the recipient’s’ marginal income tax rate. If IHT is also applied on top of this, beneficiaries could face an effective tax rate as high as 56%. While specific rules are yet to be finalised, the implications for estate planning are already clear.
If you are concerned about how these changes might affect your legacy, there are several planning strategies worth considering:
Traditionally, because of their IHT status, retirees have preferred to draw from non-pension assets first (like ISAs or cash savings), leaving pensions to grow tax efficiently. With pensions potentially entering the IHT net, it may now be wiser to use pension funds earlier in retirement and preserve assets that already fall outside of IHT.
Consider when and how much you withdraw from pensions. Managing withdrawals with a tax-efficient income plan could help you avoid unnecessary tax burdens.
You are entitled to withdraw 25% of your pension as a tax-free lump sum. Since this benefit doesn’t transfer to your heirs, it may make sense to take it early and consider gifting the funds if you do not need them.
Gifting money while you are still alive can help reduce your estate’s taxable value, provided that you survive by seven years. Alternatively, life insurance policies can be used to offset any future IHT bill, with proceeds ideally placed outside the estate via a trust.
These potential changes could significantly reshape how pensions fit into your estate planning. Now more than ever it is essential to review your financial strategy and consider seeking expert guidance to ensure your loved ones benefit as much as possible from your life’s savings.
At Hart Reade Solicitors, we provide expert legal advice on wills, estate planning, and IHT. Our team collaborates closely with financial advisors to ensure that your wealth is passed on in the most tax-efficient manner possible, offering you peace of mind while protecting your family’s future.
Please note the above is for information purposes only and is intended to be a short summary. It should not be treated as a comprehensive guide and should not be acted on without qualified legal advice.
Please telephone the following numbers to arrange an appointment:
We will maintain complete confidentiality and discretion at all times.
