In this year’s Autumn Budget, Chancellor Rachel Reeves announced that the majority of unspent pension funds will form part of an estate from April 2027
This move is expected to affect around eight per cent of estates each year.
In practice, this means when an individual dies, they will still be able to pass on their assets, but the remainder of their pension pot will be added to property and shares as part of a potentially chargeable estate.
For an individual affected by this change, this could mean that an unspent pension fund of £800,000 could be taxed at 40 per cent (depending on their circumstances and use of other allowances and reliefs) leading to an IHT bill on their pension alone of £320,000.
A significant cost for their beneficiaries if they were to pass away after 6 April 2027.
The good news is that if you plan to leave your pension to your spouse or civil partner, this inheritance will remain tax-free, but it will then be included in their estate when they pass away meaning other beneficiaries may still be affected.
However, if you do not have this option or prefer a different strategy, it may be wise to re-evaluate your retirement and estate plans in light of these changes.
Potential strategies to consider
To mitigate the IHT impact, you could:
- Consider using pension funds sooner for personal spending.
- Withdraw and gift a portion of your pension to loved ones at least seven years ahead of your passing.
- Explore alternative estate planning that may better suit your goals and avoid unnecessary tax liabilities.
If you are planning to gift from your pension, be cautious not to leave yourself short of funds for a comfortable retirement.
Taxpayers should also maintain their existing pension plans, and contributions to private and employer pension schemes still remain a tax-efficient means of reducing your Income Tax bill.
Who will be affected the most?
While this change predominantly affects wealthier individuals, many families may now find themselves liable for IHT.
Thousands more estates will exceed the current £325,000 threshold (£500,000 if you utilise the Residence Nil-Rate Band), adding financial strain to an already challenging time of grief.
Even where these allowances are passed to a spouse to offer up to £1 million of relief, many estates may find themselves subject to IHT as a result of this change.
Please be aware that within the Budget documents, it was also confirmed that the nil-rate bands would remain frozen beyond 2028 until 2030, which means extra care needs to be taken.
With the latest announcement, we advise you to revisit your retirement plan with your accountant to assess any necessary adjustments before 2027.
Early planning will help ensure you are prepared well in advance and minimise any unintended tax burdens.
If you are concerned about how this change may affect your estate, please contact our team for advice tailored to your unique situation.
