The Current Landscape: Pretty Tax-Efficient
Since 2015, pensions have become a key component of IHT planning. This is because they are typically excluded from your taxable estate. In simple terms, pension death benefits often bypass the 40% IHT charge, making them a powerful tool for passing on wealth tax efficiently.
Under the current regime this is how it works:
If you pass away under age 75 – Your beneficiaries inherit the pension tax-free, so no IHT and no income tax.
If you pass away after age 75 – Your funds remain IHT exempt however the funds are subject to income tax at your beneficiary’s marginal rate.
The current government feel that some people have been using the current set up as a clever workaround to minimise inheritance tax bills, and as a result of identifying this perceived ‘loophole’ they are looking to introduce new rules from the 6th April 2027.
What’s Changing in 2027?
From April 2027, unused pension funds passed to beneficiaries will become part of the deceased’s estate for IHT purposes. This therefore means that any personal pension funds or those left over from defined contribution employer schemes will count towards the estate and therefore be potentially liable for tax at 40% above the £325,000 IHT threshold.
So with the new regime then if you are aged 75 or older when you pass away, your loved ones could face not one but two taxes on your pension: IHT and income tax. So this is how the new regime will look in terms of IHT and income tax:
⦁ Pass away under 75 – Inherited pensions escape income tax (but not IHT).
⦁ Pass away after age 75 – Pensions subject to income tax at the recipient’s personal rate as well as being potentially liable for IHT if the estate exceeds their IHT allowances.
What Should You Do?
How we pass on wealth to those we care about is changing if the proposed changes are implemented from April 2027. If you haven’t started planning yet, don’t worry—there’s still time to act. Our financial planning experts at Temple Wealth Management are here to review your investments, pensions and estate planning strategies to ensure that your assets are arranged as tax efficiently as possible.
You can contact one of our independent advisers for personalised advice and support in making confident, informed decisions by using our Facebook or Contact Us pages, or speaking to a colleague in our office on 01329 282882.
Please note: The content of this blog is for your general information purposes only and does not constitute as Pension/IHT advice.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. The Financial Conduct Authority does not regulate tax and estate planning. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts and their value depends on the individual circumstances of the investor.
