Inheritance Tax – Pensions and the 2024 Budget

The main headlines regarding changes to Inheritance Tax (IHT) have been focussed on the change to Business Property and Agricultural Property reliefs.  This announcement has overshadowed a proposed change to the IHT treatment of unused pension funds and “other death benefits”.

Proposed changes to IHT on pensions

The proposal, expected to become effective from April 2027 is that any undrawn pension funds are to be added to the remainder of a deceased person’s estate and the aggregate of the estate and unused pension is used to calculate whether IHT is due.  If the combined total exceeds available nil rate bands, then IHT is due and is apportioned between the estate and the pension. Until the change unused pension funds pass Inheritance Tax free.

Example

If a single person (no children) has an estate worth £300,000 and a pension fund of £200,000 at present no IHT is payable.

Under the new rules the two are added together giving a total of £500,000.

Tax is payable on £175,000 = £70,000, £42,000 (60%) payable by the estate and £28,000 (40%) by the pension

Current strategy and the impact of new IHT rules

The current tax free nature of pension benefits  has led some people to organise their retirement finances in a way that preserves money held in pensions so that it can be passed on free of IHT. It has made sense for them to use money from other sources in retirement – including ISAs or other savings – before turning to pensions. 

The Budget reforms change that equation and a revised approach may be needed by those preserving money in pensions for this purpose.  This change affects not only the way in which pensioners source their income but, in addition may require that they review existing wills.  The benefit that it may have been assumed will be passed on at death will, if the estate and pension become subject to IHT change the benefit conferred, both on the pension beneficiary and the estate beneficiary.

Planning Considerations and reviewing your Will

It’s important to note that the rules have not yet been finalised and revisions could happen before they come into force. 

It seems that the change will have a limited impact where benefits are paid to a surviving spouse or civil partner, but may produce a significantly different outcome, for example, for couples who live together but are not married or in a civil partnership, for any situation in which benefits would be paid to a child, grandchild or other relative, or where someone dies after the age of 75.   

Join Our Webinar: Navigating Inheritance Tax Changes in 2024

If you’re concerned about how the recent budget proposals could affect your retirement and estate planning, join our upcoming webinar for an in-depth discussion on these key changes. Our team of experienced private client lawyers will cover the proposed inheritance tax adjustments, including impacts on pension funds, wills, and estate planning strategies.

Webinar Details:
Date: Wednesday, 15 January
Time: 1:00 pm

Don’t miss this opportunity to get expert guidance on adapting your plans to these new tax rules. Click here to register and reserve your spot today!