The recent autumn budget announcement to subject defined contribution pensions to inheritance tax (IHT) in 2027 marks a significant shift in retirement planning. This change ends the era of tax-efficient intergenerational wealth transfer via pensions, raising questions about its impact on retirees’ financial decisions.
Will this prompt retirees to deplete their pensions more rapidly? While the temptation to preemptively spend might arise, large withdrawals could trigger higher tax brackets, negating the benefit. It’s more likely that occasional gifts to family, like a holiday, will increase rather than sustained spending sprees. After all, longevity is uncertain, and depleting retirement funds prematurely risks financial hardship in later years.
The more probable shift will be towards lifetime gifting strategies to mitigate IHT liabilities. Gifts exceeding £3,000 annually are subject to IHT if the donor dies within seven years. Therefore, individuals may initiate gifting plans to start this seven-year clock. Utilizing existing allowances, like the £3,000 annual exemption or unlimited £250 gifts to different individuals, will become increasingly important. Marriage gift allowances also offer avenues for tax-efficient giving.
For those with substantial estates, the “gifting out of surplus income” rule allows unlimited tax-free gifting, provided it doesn’t compromise the donor’s standard of living and comes from regular income. This might involve paying a loved one’s rent or contributing to a child’s savings account. Meticulous record-keeping is crucial to demonstrate regularity and affordability to HMRC if questioned.
It’s important to remember that the IHT threshold remains at £325,000, plus a £175,000 residential nil-rate band for inherited family homes. Therefore, these changes primarily affect individuals with estates exceeding these thresholds.
In conclusion, the upcoming IHT changes for pensions necessitate proactive financial planning. Shifting from relying on tax-efficient inheritance through pensions to utilizing lifetime gifting strategies will be key to managing potential IHT liabilities. Consulting a financial advisor can provide personalized guidance on navigating these changes and optimizing your estate plan.
