The biggest pension bombshell of the Budget came in the form of an IHT (inheritance tax) announcement. It states that as of April 6th, 2027, inherited pension funds will be liable to IHT, so some savers will have to rethink their retirement planning.
In this article, we’ll explore the changes and explain who will be affected, how they’ll be affected, and more. We’ll also tell you some ways to mitigate IHT and ways to plan effectively for retirement.
When does IHT apply?
Previously, IHT applied to a person’s estate which would include their cumulative assets like property, other investments, and any cash savings. However, as of April 6th, 2027, pension savings will also be included for IHT purposes..
But it isn’t necessarily time to panic because most people won’t be affected by the IHT changes. It won’t apply until an estate reaches £325,000, also known as the nil-rate band, and anything less than this won’t be subject to inheritance tax.
In real terms, the Government has stated that around 10,500 more people will be affected by the IHT rules, up from around 30,000 previously affected by IHT charges on an estate. This is a relatively small percentage of the UK.
What the IHT changes mean for pensions
Previously, pensions were treated differently to the rest of a person’s assets when they pass. Income Tax would be due on pensions at the beneficiary’s marginal rate if the death took place after the age of 75, and no tax would be due if the death occurred before the age of 75.
The Budget has made this a thing of the past and pensions are now classed as part of a person’s estate after they pass and subject to IHT. The result could be double taxation for pensions passed down after the age of 75, with IHT and income tax both applying to the amount passed down. This could be a huge amount.
Ways to reduce your IHT bill
Of course, there are ways around the new IHT rules if you organise your retirement and savings effectively. An example of this would be to use money from ISAs and other savings instead of turning them into pension funds.
You can also make the most of various gift allowances, such as:
- The £3,000 allowance
You can gift up to £3,000 per year of assets or cash without paying any IHT, and you can carry this forward by one year if you haven’t used the exemption from the year before.
You can give £250 to as many individuals as you like without paying any IHT, too, as long as they haven’t already benefited from your £3,000 allowance.
- The wedding gift allowance
You can gift £5,000 to a child, £2,500 to a grandchild, and £1,000 to anybody to contribute to a wedding without paying IHT. However, the gift has to be given before the wedding takes place.
- Regular income gifts
You can give regular amounts from your income away such as your salary, rent from property you own, savings income after tax, and investment income after tax.
While there are no cash limits for these gifts, it can’t be money you need to maintain your standard of living. This essentially means it has to be an amount that isn’t above your regular income.
- Passing money to a spouse or civil partner
You can pass money to a spouse or civil partner with no IHT due. Spouses and civil partners can pass any unused nil-rate band to each other, too, and if your estate includes a primary residence, you’ll get an extra £175,000 per person added to the £325,000 threshold.
Conclusion
While the IHT pension changes came as a surprise, a relatively small number of people will be affected by the changes. For those who are impacted, there are strategies to minimise or mitigate your IHT responsibilities, so it isn’t all doom and gloom for pension savers.
For advice regarding your pension, retirement, or reducing your IHT bill, contact our experts at 020 8366 4400 or call 020 8366 4400.