Up to nearly 90% of your pension pot could be absorbed by the Treasury when you die once new inheritance tax rules are introduced in 2027, according to new calculations. The savings are at the moment exempt from the inheritance levy, but other assets incur flat rate of 40%, once your allowances have been used. However, as Rachel Reeves announced in the autumn, from April 2027, pensions will be seen as part of Brits’ estates and included in inheritance tax calculations.
Some aspects of the new rules mean that it is possible that pensions could be taxed at 87%, according to the MailOnline. If your total assets exceed £2million, you start to lose what is known as a residential nil-rate band (NRB) – the amount of an estate which can be passed on to beneficiaries free from inheritance tax after someone’s death. Under current regulations, up to £325,000 can be passed on with no inheritance tax due, but anything over can potentially face 40% tax.
The NRB is reduced by £1 for every £2 that your estate exceeds £2million. You could therefore lose your allowance if your estate is worth more than £2.35million.
This would be £2.7million for couples, as the NRB is transferable between spouses and civil partners.
But, under Rachel Reeves’ new regulations, if a couple had a family home worth £2million and a pension pot of £700,000, their taxable estate would be £2.7million, with pension included.
The NRB would shrink, and they would only have one of £650,000 to cut their bill.
Experts conclude that this couple’s loved ones would receive just £1.88million in the end.
But it gets worse, as if you die when aged older than 75, beneficiaries must fork out for income tax at their marginal tax rate when withdrawing from the pension.
This would be 20% for basic rate taxpayers. Although, for additional rate taxpayers, this could be 45%.
Ultimately, beneficiaries could only be able to access 13% of the pension left to them.
Jonathan Halberda, a financial adviser at Wesleyan Financial Services, has advised giving gifts of money or assets to loved ones is the “most straightforward” way to reduce your tax bill.
£3,000 can be given away each tax year without worrying about the inheritance levy.
You can also give away bigger cash gifts, but you would need to live at least seven years after doing this. If not, your main inheritance tax allowance would be reduced.
In October, the government said it is “removing the opportunity for individuals to use pensions as a vehicle for inheritance tax planning by bringing unspent pots into the scope of inheritance tax from April 2027, which will affect around 8% of estates each year”.
It added: “This will restore the principle that pensions should not be a vehicle for the accumulation of capital sums for the purposes of inheritance, as was the case prior to the 2015 pensions reforms.”
