Pensioners are being encouraged to plan ahead as they are set to be hit by a “tax raid” on pensions from 2027. The rules surrounding inheritance tax will soon be changed so that pensions will be liable for death duties like other assets, such as properties and savings.
The change means that more families will be hit with a tax bill once their loved ones die. Pensions have typically seen as a common way to pass on money to loved ones as they are normally exempt from death duties.
But well over half of over-50s have with at least £300,000 have said that they plan to spend more of this money to avoid paying inheritance tax, with taking holidays their most likely method of doing so, reports MailOnline.
Chancellor Rachel Reeves announced the plans as part of her autumn 2024 Budget Statement, allowing people a three year window to prepare for the changes which will come into effect from April 6, 2027. The Pension Scheme Administrators will be responsible for reporting and paying any inheritance tax from unused pensions and death benefits funds.
What is going to change?
The threshold of £3250,000 for death duties includes assets like property and savings but does not usually apply to pension pots, as these are not normally part of someone’s taxable estate. If a person dies before the age of 75 they will be able to leave a lump sum death benefit less than their remainder of the £1,073,100 threshold, or to leave the pension as beneficiary drawn or annuity.
After the age of 75, beneficiaries are required to pay income tax at their own rate for money taken out of a pension plan in whatever way it is withdrawn.
These rules will change drastically from 2027, when most unused pension pots and death benefits will form part of a person’s taxable estate. This means that if pension funds take someone’s estate to higher then their inheritance tax threshold, it will be subject to a 40 percent tax rate.
An exemption will remain for any pension death benefits paid to a spouse or civil partner, as well as for dependent’s scheme pensions and charity lump sums. This will also apply regardless of whether your pension scheme is UK registered or not.
What is the advice?
Pensioners are being urged to plan ahead now to avoid their families being hit by a shock should the worst happen. Some will be looking to spend as much of their pensions as possible while avoiding a big income tax bill.
Other options include gifting out of surplus income which is inheritance tax free or buying life insurance and putting trust in it. An alternative solution is to leave more of an estate to a spouse, who can benefit from estates free of inheritance tax.
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