In October, the government announced in the Autumn Budget its planned changes to pensions, most notably regarding Inheritance Tax. With an estimated 10,000 more estates set to become liable for Inheritance Tax, these changes could have a significant impact on your estate planning and beneficiaries. In this article, our Private Client team will explain the key changes affecting pensions and what you can do to minimise the future impact on your estate.
Inheritance Tax on pensions – what has changed?
New rules have been introduced regarding the liability, reporting and payment of Inheritance Tax (IHT) on pensions:
- Inclusion in the estate value: From 6th April 2027, most unused pension funds and death benefits will be included within the value of a person’s estate for IHT purposes. This means if your estate (including your pension) is worth more than a certain amount, your beneficiaries may have to pay IHT – as of December 2024, the IHT threshold is up to £500,000 per person.
Before the Autumn Budget 2024, money associated with pensions was often exempt from IHT. Some pensions will remain exempt from IHT, such as state pensions and certain Defined Benefit pensions with guaranteed payments.
- Reporting and payment: Under the proposals, the pension scheme administrators will become liable for reporting and paying any IHT due on pensions to HMRC. The government hopes that this change will streamline the IHT process and ensure that all tax that is owed is collected.
Previously, the responsibility for reporting and paying IHT lay with the Executors. Please note that the change in responsibility to pension scheme administrator only applies to unused pension funds and death benefits – Executors will remain responsible for reporting and paying IHT on the deceased’s other assets.
How will the Inheritance Tax changes to pensions affect estate planning?
If you have significant pension savings, the new rules could have substantial implications for your estate planning. The inclusion of unused pension funds in the estate value means that more estates may exceed the IHT threshold from April 2027, potentially increasing the tax burden on beneficiaries.
It is estimated that an extra 10,000 estates will become liable for IHT in the 2027-28 tax year, with around 40,000 estates expected to pay more IHT overall as a result of the changes.
What you can do to minimise the impact of Inheritance Tax on your estate
- Review your pension plans sooner rather than later, working with a tax specialist to assess the potential IHT liabilities you may face from 2027 onwards and consider strategies that could minimise the impact on your finances.
- Revisiting estate planning to ensure tax efficiency and alignment with the new regulations is also essential.
- Re-evaluating your pension scheme’s expression of wishes may help optimise tax outcomes and maximise benefits for your beneficiaries.
- Explore alternative IHT planning strategies – for example, trusts and lifetime gifts. Both these strategies are subject to rules and limitations and may affect other areas of your finances if not executed effectively, so we strongly advise that you speak to a tax specialist before pursuing them.
By taking the steps above, you can better navigate the changes and minimise the potential tax burden on your estate.
Trusted, expert advice on pension changes and Inheritance Tax planning
At PKF Smith Cooper, our Private Client team is dedicated to helping people understand and navigate tax changes that could impact their pensions and wider financial circumstances. Our tax experts can work with you to explore and apply strategies that minimise the impact of the IHT changes on your estate. Contact us today for tailored advice and support.
You can also read our comprehensive Autumn Budget summary for further insights. For official details on the Autumn Budget 2024, visit the gov.UK website.
