By Richard Higgs, Chartered Independent Financial Planner
The 2024 Budget announced that from 2027/8, pension funds will count towards an estate’s value for inheritance tax (IHT). This change raises questions for those using pensions as IHT-free transfers for future generations.
Taking tax free cash?
Once the new rules take effect, unused pension funds at death will face an IHT charge alongside the over-75 beneficiary’s income tax. This makes it critical to reconsider the timing of withdrawing the Pension Commencement Lump Sum (PCLS).
If the PCLS as not yet been taken, it makes no sense to leave this beyond age 75 once 2027/8 arrives – and it may be sensible to draw cash now. By gifting the cash outright, it could be excluded from IHT if the donor survives for seven years. For those hesitant to gift directly or who require ongoing income, alternative strategies such as Discounted Gift Trusts or Inheritance tax-free schemes using Business Relief can help mitigate tax liabilities.
In certain cases, a whole-of-life family trust fund policy might be a valuable tool to address the increased IHT liability created by the pension. Even if the PCLS remains in the estate, it could still result in income tax savings compared to leaving the fund intact post-75.
Taking income: ISA or pension?
Different answers depend upon varying just one assumption. The hard truth is that different combinations of estate/ pension proportions, available Nil Rate Bands, personal tax rates, beneficiary tax rates, investment returns and investment period will yield different results.
There is no one-size-fits-all rule. Take individual, independent advice!
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