The exact details of how this will work have yet to be confirmed, but families have been urged to plan ahead
Families urged to check one key document as new tax on pensions looms(Image: Getty Images/iStockphoto)
Families have been warned to prepare as a significant new pension tax is set to be introduced shortly. Chancellor Rachel Reeves revealed at last year’s Autumn Budget a substantial extension of inheritance tax, meaning the charge will soon cover pensions.
The precise details of how this system will operate remain to be confirmed.
An earlier Government consultation on the proposals outlined what the alterations will entail. The document states: “Most unused pension funds and death benefits will be included within the value of a person’s estate for inheritance tax purposes and pension scheme administrators will become liable for reporting and paying any inheritance tax due on pensions to HMRC.”
Chris Ball, CEO of financial advisory firm Hoxton Wealth, encouraged pension savers to prepare for the modifications.
He described the alteration as triggering a “major shift” in how individuals must consider their long-term financial planning. He commented: “Anyone likely to be affected should start reviewing their arrangements now, which means reviewing who you’ve named to inherit your pension, considering whether to draw down more during retirement rather than leaving large untouched pots, and weighing up the use of other tax-efficient vehicles such as ISAs or lifetime gifting strategies.”, reports the Mirror.
With numerous pension schemes, there exists a document called an ‘expression of wish and nomination’, where you can designate who you would prefer your pension to be transferred to if you don’t withdraw from it.
This isn’t legally binding on the pension provider, but they will consider your preferences when determining who to distribute your pension to.
What might inheritance tax on pensions amount to?
Inheritance tax is charged at 40 per cent on the total assets you leave behind when you pass away. There are various individual allowances which enable you to leave up to a certain sum tax-free, including a standard £325,000 allowance, plus a £175,000 allowance if you are leaving your main residence to a direct descendant.
Therefore, if you possessed a £10,000 pension pot when you died, if the entire sum was liable for inheritance tax, your beneficiaries would need to pay £4,000 in tax. Mr Ball stated the alteration in the rules is exasperating for individuals who have accumulated their pensions with the hope of leaving them tax-free.
He commented: “There is understandable frustration among savers who have contributed for decades under the assumption that pensions would remain outside inheritance tax. While Governments can change tax policy at any time, altering long-standing expectations always risks feeling unfair, particularly for those near retirement with limited scope to adjust.”
Pensions are due to become subject to inheritance tax from the beginning of the 2027/2028 tax year, starting on 6 April 2027. When questioned about the possibility of the Government postponing the implementation of this new policy, Mr Ball stated: “The April 2027 start date could theoretically slip if the policy detail isn’t ready.
“This has happened with complex pension rules before, but people shouldn’t rely on a delay.”
He suggested that the more significant issue is whether the tax benefits associated with pensions should be reduced.
He commented: “There’s a balance to strike. Incentives must be attractive enough to encourage retirement saving, yet not so favourable that pensions become purely an inheritance planning tool. If the government feels the pendulum has swung too far, it may look to tighten reliefs elsewhere rather than rely solely on IHT.”
During a debate in the House of Lords this week regarding this issue, Lord Livermore, financial secretary to the Treasury, said: “The Government continue to incentivise pension savings for their intended purpose of funding retirement. Most unused pension funds and death benefits payable from a pension will form part of a person’s estate for inheritance tax purposes from 6 April 2027.
“This removes distortions resulting from changes made over the last decade, which have led to pensions being openly used and marketed as a tax planning vehicle to transfer wealth, rather than to fund retirement.”