30 October 2024
If you are covering the budget and the changes to the IHT treatment of pensions, please see the following comment from Jon Greer, head of retirement policy at Quilter:
"The changes to the IHT efficiency of pension will come as a blow to many. Previously pensions could be passed on free of inheritance tax (IHT), allowing many people to use pensions as a tax-efficient vehicle to pass on wealth to their heirs. The tax treatment of funds remaining in a pension at death were very favourable. If an individual died before age 75 the funds were not subject to income tax if paid as a lump sum within the deceased’s available lump sum and death benefit allowance. In addition, any funds remaining in a pension at death regardless of age are not subject to inheritance tax.
"The removal of the IHT exemption will result in a double tax hit for beneficiaries, although the normal exemption for spouses and civil partners will continue to apply. Not only is the pension subject to income tax when drawn (if the deceased is over 75), but it also now falls within the scope of inheritance tax. For families inheriting larger pension pots, this will lead to significant tax liabilities, depending on the recipient’s income tax bracket.
"Many who have maximised pension contributions in recent years, following the scrapping of the lifetime allowance, are rethinking their approach. The change particularly affects high-net-worth individuals who currently delay tapping into their pensions to maximise the IHT benefits, potentially prompting them to consider other strategies for their pension before they die.
"Ultimately, while this move helps raise additional revenue to address the fiscal deficit, it also marks the government attempting to return pensions to solely a vehicle for retirement planning and not IHT planning. However, the problem is that there will be many people that have been planning their finances around the previous rules.
"The payment of pension death benefits is likely to be delayed whilst scheme administrators and personal representatives exchange information necessary to work out the tax due. A consultation has been launched to try to drive efficiencies in what could be a long drawn-out process.
"Now more than ever higher net worth families must get advice to help them navigate other IHT mitigation strategies such as gifting and trusts."
