Inheritance Tax (IHT) Changes Affecting Pensions from April 2027
Following the recent Budget announcement, we would like to inform you of significant proposed changes to the rules concerning the taxation of pensions on death, coming into effect from 6 April 2027.
Current Rules
At present, because pensions are held in a ‘master trust’, any unused pension savings on death are usually excluded from your estate for IHT purposes and can be passed on to beneficiaries without incurring IHT, provided they are distributed at the discretion of pension scheme trustees. This has made pensions a valuable asset for estate-planning purposes.
Whilst pension funds are generally outside your estate for IHT purposes, the current rules state that beneficiaries only pay income tax on withdrawals if the member dies after age 75. If the member passes away before age 75, no income tax is payable by the beneficiaries.
What's Changing?
It was announced in the autumn budget that from 6 April 2027, the government will amend the rules so that unused pension savings may be included in your estate for IHT calculations. This could mean that if the total value of your estate, including your pension savings, exceeds the IHT threshold, the excess may be subject to tax at 40%. The current IHT thresholds are:
· £325,000 for most estates
· £500,000 if passing a home to direct descendants (children or grandchildren), provided the estate is worth less than £2 million
· Transfers to a spouse or civil partner remain IHT-free, but the pension (like any other asset) will become part of the surviving spouse’s estate.
These thresholds are set to remain unchanged until at least 2030.
In addition to inheritance tax, the government is proposing to retain the current beneficiaries’ income tax regime. This means that, alongside being subject to IHT, beneficiaries would continue to pay their own rate of income tax on withdrawals if the member dies after age 75. If the member passes away before age 75, no income tax would be payable by the beneficiaries.
How Might This Effect You?
If you have significant pension savings that you intend to leave to your beneficiaries, this change may have a substantial impact on your estate planning. However, it is important to note that pensions remain a tax-efficient way to save for retirement.
What Should You Do Next?
We strongly recommend reviewing your pension arrangements and estate plan to ensure they remain aligned with your financial goals. Strategies to consider may include:
· Utilise your pension savings during your lifetime
· Exploring gifting, whole of life cover or other estate planning strategies to mitigate potential IHT liabilities.
We are here to help you navigate these changes and explore the best options for your circumstances. If you would like to discuss how these changes may affect you, please do not hesitate to get in touch.