Should Your Pension Planning Strategy Change?

We ask the question, ‘Post Budget, should your pension planning strategy now change?’

The answer: Perhaps, but maybe not just yet. Here’s why…

A quick recap of the bad news:

In recent years, some pension schemes have been increasingly used as a tax planning tool to transfer wealth without an inheritance tax charge, rather than for their intended purpose of funding retirement.

One of the most significant changes revealed by the chancellor is the inclusion of pension death benefits in an individual’s estate for inheritance tax (IHT) calculations. Previously, pensions were typically exempt from IHT. The Government has issued a consultation paper explaining that from the 6 April 2027, the value of the gross funds in the pension immediately before death will be included in the value of an estate, and IHT will need to be deducted if the deceased’s estate exceeds their IHT nil-rate band. The IHT charge will be paid by the scheme and before being distributed or designated to the beneficiary.

In addition, in certain circumstances the Pension Scheme Administrator, currently and from 2027, may need to deduct Income Tax at the beneficiaries’ marginal rate when payments are made. The amount of tax payable could vary depending on how a beneficiary chooses to take the benefits and their individual tax rate at the time, which in most circumstances will lead to some significant double taxation.

However, at this time most of the original benefits of building savings for retirement in a pension remain:

The tax-free lump sum allowance has not been changed in this budget, meaning in most circumstances 25% of the pension can be taken tax-free, subject to the current standard limit of £268,275.

The amount you can pay into pensions has not changed at this time, nor the ability to get tax relief on your contributions at your highest marginal rate. This could offer a tax efficient way of drawing funds from a company or obtaining tax relief whilst you are working, with the potential of possibly drawing it later in life at a lower tax rate.

Will behaviour change?

Almost certainly. It is important to recognise that most clients with pensions are already using them for their original purpose, i.e. to take income or make capital withdrawals to support their retirement. However, for those that are not expecting to need all the retirement funds themselves, we expect to see an increase in withdrawals during people’s lifetimes – either to spend more due to the prospect of IHT charges or to make gifts during their lifetime. Some will continue to access pensions in a flexible way; however, some people may choose to take a guaranteed income by way of an annuity, for example. Decisions will be highly personal though.

What should I do?

As the new rules do not apply until the 6 April 2027, clients and their advisers have time to fully consider the changes. In addition, the complexity of the implementation and potential harshness of the ‘double taxation’ for deaths over age 75 may lead to changes after the consultation period ends in 2025, and before the implementation date… but that may be wishful thinking.

It is important to remember that at this time, until the changes take effect in April 2027, pensions in most circumstance are currently still outside of estates for IHT purposes. We would recommend that you sit down with your tax adviser and financial planning adviser shortly so you can start to consider how these changes may affect your own personal planning.

Some points to consider include:

• The benefits to continue saving into a pension for use in retirement or later in life.
• Where all or some of the pension funds are not required, taking the tax-free cash and taxable income withdrawals to make gifts may now be a much more attractive option than just leaving the pension unused, which may be subject to IHT later in life.
• Where clients have deferred taking tax-free cash from their pension beyond the age of 75 in particular, perhaps this should be reviewed. Taking the tax-free cash may ensure that it is only subject to IHT on death and not IHT and income tax potentially.
• Review all death benefit nominations. Passing a pension onto a surviving spouse may provide opportunities to remove the pension from the spouse’s estate before the second death occurs.

• Wider planning may be needed to manage and gift other assets if more funds are going to be drawn and used from individuals’ pensions.

Get In Touch

For more information or advice, contact your local Whitings LLP office or Whitings Wealth Management office today!

Disclaimer - All information in this post was correct at time of writing.