Protecting your estate from inheritance tax just got more complicated, with pensions now added to the list of taxable assets.
This change means some families could face up to a 40% tax on their loved one’s estate if they exceed the IHT threshold. For many, the idea of their hard-earned retirement savings going to taxes instead of loved ones is frustrating.
Let's unpack the details of this shift and explore practical ways to protect your legacy.
What’s Changing with Pension Inheritance Tax?
Traditionally, pensions were passed on without triggering IHT, providing a valuable “tax haven” for families who wanted to preserve generational wealth. But as of April 2027, pensions could push estates over the IHT threshold—£325,000 for individuals—resulting in a substantial tax on anything above. With the Lifetime Pension Allowance scrapped, the government is increasingly turning to estate taxes to help balance budgets.
Who Will Be Affected by This Change?
These changes to IHT on pensions primarily affect estates where pension funds are not “drawdown” or where beneficiaries don’t access the pension immediately upon the holder’s death. If your pension was meant to supplement family security, be aware that it may now come with an unexpected tax burden.
The new rules are especially relevant for families where a large portion of assets is tied up in pensions or other investments. Estates on the cusp of the IHT threshold—those that may not have considered themselves wealthy—may now be at risk due to rising property values and this inclusion of pensions in taxable assets.
How to Minimize the IHT Impact on Your Pensions
So, how can you reduce the risk of these unexpected costs? Here are a few strategies worth considering:
1. Consider Drawing Down Your Pension
If you’re over 55 and not yet reliant on your pension, it might make sense to start drawing down funds. If possible, draw on your pension over time rather than leaving a lump sum. This strategy can reduce the taxable estate size, keeping it below the IHT threshold.
2. Explore Trusts and Gifting
If you have substantial assets, placing them in a trust or gifting portions of your pension or other assets can help lessen the tax burden. Trusts can provide significant tax benefits, allowing more assets to reach your beneficiaries.
3. Review Your Beneficiary Designations
Confirming that pension beneficiaries are correctly designated can sometimes reduce the IHT burden. Keeping nominations up to date and strategically planning how your pension will be distributed under the new rules is essential.
4. Seek Professional Guidance
With tax rules constantly evolving, staying informed can be challenging. A specialist tax consultant can help you navigate the new rules, ensuring your wealth reaches loved ones instead of falling to IHT.
Don’t Let IHT Catch You Off-Guard
Remember you have time to plan for these changes, and while these changes can be unsettling, a bit of planning now can save your family from an unnecessary tax hit later. Explore your options and understand how these rules affect your estate to protect what you’ve built and ensure it reaches the people you care about.
Don’t let these tax changes haunt your plans! Take charge and consider consulting a trusted advisor who can provide tailored support to help you understand these new regulations.
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