How to prepare your pension – and how you use it – against new inheritance tax changes
There will be big changes to pensions over the next 12 months; Your hard-earned retirement savings will be available as part of the value of your total estate for inheritance tax (IHT) when you die.
The reforms will not come into force until 6 April 2027 and will affect how much you can leave to your loved ones without being stymied by an inheritance tax bill.
Currently, pension savings are not used in property valuation when calculating IHT charges when someone dies.
This means any remaining money in the pension can be transferred without worrying about generating a tax bill. However, starting from the new tax year in April 2027, pensions will will be included in property calculations.
This increases the chances of increasing the value of a property above the IHT threshold, which is currently £325,000. This situation is exacerbated by the freeze on inheritance tax reliefs until April 2031, increasing the likelihood of financial distress.
With just over 12 months to go, it would be beneficial to prepare for retirement changes without panicking, experts say; Here are some steps you can take before and after this change goes into effect.
Get your retirement income
You can access your pension at any time from the age of 55; the main options are to receive an annuity or maintain the investment and withdraw money through withdrawals.
So it might be worth thinking about how you’ll access the money after April 2027.
Colin Low, managing director at financial advisory firm Kingsfleet, said: “Perhaps a person has been drawing on other assets and leaving their retirement fund untouched, but it may now be wise to draw on retirement income and plan to use other assets for estate planning arrangements.
“Each client will need specific advice on the combination of arrangements most suitable for them and the level of risk they are willing to take.”
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gift giving
By using gift funds, you can transfer wealth to your loved ones while they are alive.
This helps transfer money or other assets and reduces the value of your property, but also means you get to enjoy your hard-earned wealth.
Up to £3,000 can be donated per tax year as a financial gift to a loved one. There is also a separate allowance of £250 per person, but the recipient of the £3,000 cannot be the same person.
Tax-free gifts of up to £5,000 can be made to your children for a wedding or civil partnership, or £2,500 for a grandchild or great-grandchild.
More valuable assets can also be transferred and you won’t have to pay inheritance tax as long as you live for seven years after the gift is made.
Nouran Moustafa, practice director at Roxton Wealth, said: “For some older clients, gift-giving may make sense, but only if it doesn’t compromise their financial security. The longevity risk is real and giving too much too soon can create problems later.”
Increase your retirement contributions
putting More The money you put into retirement can still be beneficial as you’ll still get tax relief – plus most people don’t know when they’ll die, so this also means you’re increasing the amount of money you have for your own golden years.
It’s also worth putting as much money into your retirement pot as possible through your workplace pension before limits on National Insurance benefit (capped at £2,000) are introduced from April 2029.
Moustafa added: “Maximizing pension contributions may still make sense for those in the savings phase, especially given the income tax benefits, but decisions must be aligned with retirement and inheritance goals, not just tax changes.”
Insurance
If you think your estate will still leave you with a large inheritance tax bill even after gift allowances and withdrawing some of the money, another option is insurance.
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There are life insurance policies that may provide a payout to cover the cost of inheritance tax.
Ian Dyall, head of estate planning at wealth management company Evelyn Partners, said: “The cap written in trust is designed to fit the expected IHT exposure after exemptions and exemptions and is often used in conjunction with steps to reduce liability, such as lifetime forgiveness.”
As with any life insurance policy, you pay the premiums while you live and are paid out when you die.
Dyall added: “Of course, there are costs of arranging a whole life policy and trust and premiums can be expensive, especially as life assured ages advance. It is important that this cost is appropriately weighed against the IHT benefit, ideally through comprehensive cash flow modelling.”
“Given that death, tax bill and payment are guaranteed, it may help to think of whole life insurance as an ‘investment’ for your estate rather than an insurance policy.”
When investing, your capital is at risk and you may get back less than you invested. Past performance does not guarantee future results.
