In the second of three blogs, we look at changes to Pensions announced in the Autumn Budget on 30 October 2024.
Overview
A key point from the Autumn Budget, glossed over by Chancellor Rachel Reeves, is that inherited pensions will be subject to Inheritance Tax (‘IHT’) from April 2027.
To appreciate this significant change, it is useful to understand the current provisions before analysing the proposed changes.
What is the position on Pensions on death, pre-2027?
Discretionary Pensions are written in trust and, provided you have let the Trustees of your pension scheme know what you want to happen to your pension on your death (known as nominating a beneficiary), can be passed on, outside of your estate and most importantly, free of IHT.
Non-Discretionary Pensions including the NHS, judicial schemes (in the UK) and many non-UK schemes are treated as part of an individual’s estate for IHT purposes. IHT is paid on them by the Personal Representatives (‘PRs’) in the estate.
Discretionary pension schemes have been widely used as a tax planning tool to transfer wealth without being subject to IHT. The abolition of the Lifetime Allowance in March 2023, which removed the cap on the amount of tax-relievable pension savings an individual can accumulate over their lifetime, has further driven investment into pension pots. Individuals can therefore accumulate unlimited tax-free savings in their pension whilst drawing on other means to fund their retirement, leaving their unused pension assets to be inherited by beneficiaries free of IHT.
The beneficiary of such a pension passed on from a deceased family member (aged 75+) is subject to income tax on any benefits taken.
What is the position on Pensions on death, post 6 April 2027?
From 6 April 2027 most unused pension funds and death benefits in both discretionary and non-discretionary schemes will be included within the value of a person’s estate for Inheritance Tax purposes.
According to HMRC, Pension scheme administrators will become liable for reporting and paying any Inheritance Tax due on pensions to HMRC.
If you would like to discuss Pensions in IHT or Estate Planning, generally, please contact our Private Client team on 01638 560556. Alternatively, you can email a member of the team directly at mike.lambert@edmondsonhall.com or stephen.roberts@edmondsonhall.com.
This blog is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
