Do the new IHT reforms make a large pension less appealing?

Pensions have been a good investment strategy for years, as they have provided a tax-efficient place to store additional income to be enjoyed at a person’s leisure later in life.

This has always come with the notion that anything unspent can be handed down to the next generation so that the fruits of labour can continue to be enjoyed.

However, the recent changes to Inheritance Tax (IHT) have caused many to become concerned that pensions have now lost their appeal.

Unspent pensions will soon be considered part of your estate for IHT calculations, and the time has come to reassess the efficiency of the age-old saving system.

What changes are coming to IHT?

From 6 April 2027, the scope of a person’s estate for IHT is expanding to include any unused pension funds and death benefits.

This could see your assets facing up to a 40 per cent tax depending on the overall size of your estate and any allowances that you have used.

Prior to this point, any unspent pension will pass tax-free to your heirs, but this exemption will be effectively removed when the changes come into force.

Although there is an ongoing debate around the implementation of IHT changes, it is unlikely that the Chancellor will back down on any of these proposals.

Even if you ensconce yourself in sunnier climes, you will still be subject to IHT if your assets are going to pass to relatives living in the UK.

The current thresholds for IHT are also frozen until 2030, which means that more people than ever will be pushed into paying, as fiscal drag makes assets worth more on paper even if their real-world values fail to increase.

All of these factors combine to make many concerned that their pensions may be the final straw that places undue financial stress on their families.

What can you do now to lessen your IHT burden?

It can feel like IHT is an inevitable part of your future finances, but this might not be completely accurate.

Until the changes fully come into effect, there is still time to adjust your estate to make it more tax-efficient.

Nominating a spouse or partner as a beneficiary means that your assets will pass to that person without incurring IHT.

This is only a temporary solution, but it could give them time to restructure your former estate to lessen the IHT burden on your heirs.

It might be time to consider putting less money into a pension and taking a higher salary while you still work.

Gifting is also a strategy that is still an effective way of reducing your IHT bill, as gifts given more than seven years before you die are tax exempt.

The gifting rules may change in the not-too-distant future, but it is still a good avenue for reducing IHT where it is possible to do so.

If you feel that your estate is creeping close to the IHJT threshold, now is the time to seek professional guidance to see if there is an effective way of keeping your bill as low as possible.

We are on hand to talk you through the options available to you to ensure that your finances remain under your control.

The clock is ticking, and acting before 2027 gives you the best chance to reduce your family’s tax exposure and spare them administrative headaches down the line.

Keep control of your financial future by speaking to our team today!