Big Pension Changes heading our way – Should we be worried?
In late 2024, Chancellor Rachel Reeves announced plans to close the “loophole” that gives pensions preferable treatment with regards to Inheritance Tax (IHT). Since then, discussions have been ongoing around the potential changes, how they might be implemented and who they will affect.
What might be changing?
Under the proposed changes, from 6 April 2027, unused pension funds and death benefits paid from a pension will be included in an individual’s estate for IHT purposes. The government estimates that this will impact around 8% of estates annually*, increasing the tax burden on many families who had previously planned to pass on pension savings tax-efficiently.
Why are the Government doing this?
Currently, pensions enjoy preferential IHT treatment compared to other assets. When someone passes away, their unused pension funds are generally exempt from IHT, allowing wealth to be passed on tax-free in many cases. The government sees this as an unintended tax advantage, benefiting wealthier individuals who use pensions as an estate planning tool rather than purely for retirement income.
With only around 8% of estates estimated to be impacted annually, it suggests the policy is aimed primarily at wealthier households. It will particularly affect those with substantial pension savings that they do not need to draw down during retirement.
The move will also generate additional tax revenue. By including pension assets in an individual’s estate for IHT purposes, the Treasury stands to collect more from wealth transfers, helping to fund public services. The Labour government have also framed this move as a step towards making the tax system fairer, ensuring that wealthier individuals do not receive disproportionate tax advantages.
Should you be concerned or take action now?
Where these changes could have the most impact are those over 75, where pension pots are already subject to income tax in the hands of the beneficiary (the person who inherits the pension). This means that today, 20%, 40% or even 45% income tax could be liable on pensions upon death if aged over 75. These changes mean a pension, beyond 2027, could pay Inheritance Tax at 40%, then income tax up to 45% – that’s a considerable amount of tax!
Waiting for further details will ensure you can make an informed choice based on all the facts.
In the meantime, if you have any questions or concerns around this or any aspect of Inheritance Tax, please feel free to contact Amber River True Bearing on 01257 260011 to arrange a no-obligation introductory appointment at our expense.
