Maximise pension legacy after 2027 IHT changes

Do you wish to maximise your legacy from pensions post 2027

Talk to one of our financial advisers on the options to maximise the legacy for your loved ones in light of the changes from the 2024 Budget and the inheritance tax payable on unused pension pots from April 2027.

Background

For many years, the advice for retirement planning was simple: put money into pensions first and take it out last. This was because of the combination of the attractive marginal income tax relief whilst contributing to your pension and because they were a great way to pass on money to your beneficiaries without it being subject to inheritance tax as part of your estate.

IHT from April 2027

However, in October 2024, the government announced that from April 2027, unused pension funds would be brought into the IHT net. Although the fine print about how this will actually work is still awaited, it seems inevitable; the point of providing generous tax relief whilst building up pension funds is to provide taxable income in retirement, not to provide a tax-free legacy for your beneficiaries!

The bill could be 64% or even more in some circumstances

As it stands, some unused pension pots could be subject to IHT and income tax payable by the beneficiaries as they draw income. The following tables provide a quick overview of what is happening:

As it currently stands, for those over age 75, unused pension funds are first subject to IHT and then income tax on the residual when the beneficiary draws down income. The review of how it works may remove this anomaly, but there is no guarantee.

The combination of 40% IHT & then perhaps 40% income tax means that beneficiaries can end up being hit with an overall 64% tax charge. There may be circumstances where this is even higher for individual taxpayers.

If you are concerned by this we would be delighted to cast a fresh pair of eyes over your financial planning to run through the options open to you.