Since the pension freedoms were introduced in 2015, pensions have been a tax efficient way of passing on wealth to future generations. Funds remaining in pensions on death were not deemed part of an individual’s estate for inheritance tax (IHT) purposes, though potentially subject to income tax, depending on when death occurs. Generally being income tax free pre 75; income taxable post 75. However, in her recent Budget Rachel Reeves confirmed that from April 2027, funds remaining in pensions on death will be included in an individual’s estate, and, therefore, potentially liable to IHT. Particularly penally as the existing rules surrounding payment of income tax remain, meaning there may be a double tax charge for some i.e. IHT initially, and income tax thereafter.
The table below provides a basic summary of the comparable tax position pre and post April 2027:
| Age of Death | Current Tax Rate to April 2027 | Tax Rate Post April 2027 |
| <75 | 0% – Irrespective of income tax position | 40% – Irrespective of income tax position |
| >75 | 20% – Basic Rate Taxpayer
40% – Higher Rate Taxpayer |
52% – Basic Rate Taxpayer
64% – Higher Rate Taxpayer |
This is a huge change in direction for pensions and returns us more closely to the rules prior to the 2015 pension reforms. This will certainly lead many into revisiting their retirement plans and overall strategy with their pensions. In recent years many individuals have been funding their retirement using other assets such as savings and investments, assets that are deemed part of an individual’s estate for IHT, preserving funds in pensions which can be passed on to future generations tax efficiently. With the changes being introduced, it may result in many viewing their pensions as they were previously: retirement planning accounts.
Whilst the changes are naturally disappointing, we still firmly believe that pensions continue to remain hugely important, tax efficient accounts. Whilst there were rumours around other potential changes to pensions in the Budget, these proved to be unfounded, meaning pensions still benefit from tax relief on contributions, tax free growth and the ability to draw 25% tax free at retirement. Sadly though, we’ve lost the cherry on top!
The changes to pensions mean reviewing your position will be sensible for many. Common things to consider will be when to draw tax free cash and what to do with this; whether to begin taking an income; reviewing the pension/s you have in place; potential gifting or considering other IHT efficient investments.
It is important to look holistically and consider the interaction of pensions with the other assets you hold and potential taxes payable. Like many things, there will not be a one size fits all approach, meaning taking advice is important.
Hazlewoods Financial Planning
Established in 1988, Hazlewoods Financial Planning are a firm of independent financial advisers. Our advisers have a combined century of experience in the financial services industry, with over 70 of these spent at Hazlewoods. Please get in touch if you would like to discuss your pension position with a member of our Financial Planning Team.
