Inheritance Tax on Pensions

What is proposed?

IHT at 40% will apply to any pension value upon death unless covered by an allowance or the spousal exemption. For people with other assets which already use up the nil rate band and residents nil rate band (if applicable), this means any remaining pension will suffer IHT on death of the owner or upon 2^nd death for a married couple.

For people who die after 75, there is a double tax hit – the estate will pay IHT and the beneficiaries will then pay income tax at their marginal rates as they draw from the inherited pension. For example, a £100,000 pension pot would lose £40k to inheritance tax and then a further £24,000 income tax upon drawdown of the beneficiary was a higher rate tax payer. This equates to a combined tax rate of 64%.

What does this mean?

For the past decade, pensions have offered the opportunity to both build funds for retirement and to mitigate IHT. People were generally best advised to spend other assets before pensions in retirement as a result. This has changed. Subject to their wider position, many should now consider spending their pensions earlier or perhaps using them to support regular gifting to the family if estate planning is a priority. It is potentially worth paying income tax now to reduce the pension for older people especially, as this be will less of a tax blow than paying IHT on death and then income tax in the hands of the beneficiaries.

A larger taxable estate also means that other options to mitigate IHT will need to be considered, including but not limited to, gifts to trust, insurance and use of other allowances.

What to do?

This is a complex area, and any action will need careful consideration. Advice is highly recommended.

If you have any questions or would like to speak to me or any of Brooks Financial’s team of FCA authorised advisers, please get in touch.