Pension Changes

The Guardian recently highlighted this trend, noting that many older individuals are withdrawing substantial sums from their pensions to spend or gift to family members.

Understanding the Upcoming Changes

Currently, defined contribution pensions are typically excluded from one’s estate for IHT purposes. However, starting April 2027, unspent pension funds will be included in the estate and subject to IHT. This means that any remaining pension savings upon death could be taxed at 40% if the total estate exceeds the IHT threshold.

Why This Matters

For many, pensions were a strategic tool to pass wealth to the next generation tax-efficiently. With the new rules, this advantage diminishes, prompting retirees to reconsider their financial plans.

Proactive Steps to Consider

• Utilise the Tax-Free Lump Sum

You can typically withdraw up to 25% of your pension pot tax-free, capped at £268,275. Accessing this now allows you to gift or use the funds before the new tax implications take effect.

• Gifting to Family

Gifts made more than seven years before your death are generally exempt from IHT. Even if you don’t survive the full seven years, taper relief may reduce the tax owed.

• Review Your Estate Plan

It’s crucial to reassess your estate planning strategies considering these changes. Consulting with professionals can help optimise your financial legacy.