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Pension Changes and Inheritance Tax: What You Need to Know
Confirmed
In Short: Inheritance tax thresholds in the UK are frozen, leading to increased interest in lifetime gifting to reduce tax bills.
Inheritance tax in the UK is one of the most unpopular taxes, with the standard allowance set at £325,000 and frozen since 2009. This means that more estates are now falling into the net of inheritance tax, particularly those with substantial savings or pensions. According to a poll by the investment platform Wealthify, 61% of parents plan to leave cash gifts to their children, recognizing the tax benefits of doing so.
Financial planners are advising individuals to consider lifetime gifting, which can be incredibly tax-efficient. By giving an inheritance while still alive, the size of an estate is reduced, thereby lowering a future inheritance tax bill. This strategy is particularly relevant for those with significant savings or pensions, as the inclusion of pensions in inheritance tax from 2027 will further complicate estate planning.
For those aged 55 or over, the decision to take a 25% tax-free lump sum from their pension is becoming increasingly complex. The minimum age for taking benefits from a private or workplace pension is expected to increase to 57 in 2028, aligning with the State Pension retirement age. This change, coupled with high mortgage interest rates, means that individuals must carefully weigh the pros and cons of paying off debts versus leaving the money invested in their pension.
Rachel Vahey, head of public policy at investment platform AJ Bell, advises that different pension schemes have different rules, and individuals should check with their provider to understand the specifics. She emphasizes the importance of seeking professional advice before making any decisions, as taking a lump sum from a pension can significantly impact future retirement income.
The 2024 Budget announced that pensions will be brought into the scope of inheritance tax for the first time from 2027. This development underscores the need for individuals to plan ahead and consider strategies to minimize the tax burden on their estates. With the rising cost of living and high house prices, many are turning to lifetime gifting as a way to support loved ones and reduce potential inheritance tax liabilities.
What's confirmed
- Inheritance tax in the UK is one of the most unpopular taxes, with the standard allowance set at £325,000 and frozen since 2009. This means that more estates are now falling into the net of inheritance tax, particularly those with substantial savings or pensions. According to a poll by the investment platform Wealthify, 61% of parents plan to leave cash gifts to their children, recognizing the tax benefits of doing so.
- Financial planners are advising individuals to consider lifetime gifting, which can be incredibly tax-efficient. By giving an inheritance while still alive, the size of an estate is reduced, thereby lowering a future inheritance tax bill. This strategy is particularly relevant for those with significant savings or pensions, as the inclusion of pensions in inheritance tax from 2027 will further complicate estate planning.
- For those aged 55 or over, the decision to take a 25% tax-free lump sum from their pension is becoming increasingly complex. The minimum age for taking benefits from a private or workplace pension is expected to increase to 57 in 2028, aligning with the State Pension retirement age. This change, coupled with high mortgage interest rates, means that individuals must carefully weigh the pros and cons of paying off debts versus leaving the money invested in their pension.
- Rachel Vahey, head of public policy at investment platform AJ Bell, advises that different pension schemes have different rules, and individuals should check with their provider to understand the specifics. She emphasizes the importance of seeking professional advice before making any decisions, as taking a lump sum from a pension can significantly impact future retirement income.
- The 2024 Budget announced that pensions will be brought into the scope of inheritance tax for the first time from 2027. This development underscores the need for individuals to plan ahead and consider strategies to minimize the tax burden on their estates. With the rising cost of living and high house prices, many are turning to lifetime gifting as a way to support loved ones and reduce potential inheritance tax liabilities.
What's still developing
- There is nothing she does not know about pensions.
- I have no children but want to leave money to my nephew when I pass.
- If you’ve built up substantial savings or pensions, and own your home, the frozen thresholds and inclusion of pensions mean the chances of a portion of your wealth being subject to 40 per cent IHT is increasing.
- The twins say they would never have been able to buy their two-bedroom flat in North London without an early inheritance from their grandparents.
- Here we outline some of the factors you’ll need to weigh up, and explain how to get advice on your pension.
- For example, with best buy mortgage rates currently high, you’ll need to weigh up whether, over the long term, paying off the mortgage might be a better option for your money than the investments in your pension.
- Bear in mind that the rules covered below apply to defined contribution pensions, where any contributions you make are invested, and the amount you end up with when you retire depends on how much has been paid in and how your investments have performed.
- You can find out more about defined benefit or final salary pensions and taking a tax-free lump sum from this type of scheme at the end of the article.