How to shield your pension from Labour’s inheritance tax raid
Financial advisers are cautioning against taking extreme measures in response to the government’s plans to slap inheritance tax on unspent pension pots from April 2027. However, there are some measures that savers can take as part of their overall estate planning strategy.
Pension pots are usually exempt from inheritance tax. But in last October’s Budget, Chancellor of the Exchequer Rachel Reeves announced measures intended to close some inheritance tax loopholes.
Four per cent of estates are currently liable to inheritance tax, although the government expects this to rise to 10 per cent by the end of the decade.
The Treasury expects that bringing pensions within the scope of inheritance tax will affect approximately eight per cent of estates every year, raising £1.5bn annually by 2030.
The impact on pensions
The policy remains under government consultation. As well as bolstering the Treasury’s coffers, including pensions within the scope of inheritance tax is viewed as a way of ending their use as a vehicle to amass and pass on wealth and a shift instead towards ensuring that they are used as income in retirement.
Financial advisers are keen to emphasise that the policy has yet to come into force and to avoid making any knee-jerk decisions.
“You do need to be mindful of doing particularly drastic moves that can disrupt things, for example taking everything out of the pension,” says Stuart Gibbs, chartered financial planner at Prydis Wealth.
Withdrawing funds from a pension can incur a tax charge – upon reaching the age of 55, savers can normally withdraw up to 25 per cent of the sum accrued in a pension as a tax-free sum, up to a limit of £268,275.
Making gifts, using spousal and civil partnership exemptions, and simply spending your pension are all viewed as options for savers in response to Labour’s inheritance tax raid.
Inheritance tax on pensions
The government’s plan to impose inheritance tax on pensions is coming up in conversations with clients “all the time”, says Daniel Payne, chartered financial planner at Golden Oak Wealth Management.
For now, Payne suggests that savers carry on “business as usual”. But should the policy come into effect, he notes a number of options available to savers.
Savers could withdraw from their pot up to their tax-free limit and spend the proceeds or move their money into a trust. They can place up to £325,000 per person into a discretionary trust with no inheritance tax liability.
Being married or in a civil partnership currently exempts a surviving partner from inheritance tax on any transferred assets.
This exemption “is still thought to apply on transfers of pension assets between spouses/civil partners on death, so on first death, a pension holder can pass the value of their pension fund to the surviving spouse or civil partner free of IHT” says Paul Dawson, senior manager at Broadstone.
Those who are not married or in a civil partnership would not get the spousal exemption, which could lead to a pension losing up to 40 per cent of its value to inheritance tax before the partner receives it.
“We may see an increase in marriages to help protect the surviving (would-be) spouse from losing assets that they’re reliant on for retirement income”, says Tom Redmayne, chartered financial planner at Rockwealth.
“The best way people can shield their pensions from inheritance tax is to spend down their pensions whilst they’re alive and, ideally, well enough to enjoy doing so,” he adds.