We’ve been challenged by pension planning on Monevator before. In particular you may recall my previous post on a fictional middle-class duo, Sarah and Stephen, and their pensions-and-IHT-planning saga.
Near the end of that piece, I read the vibes coming from the presumed shoe-in of an incoming Labour government and confidently declared:
Nor do I think it’s likely they bring pensions into people’s estates.
Pensions are trusts, and this would require the overhaul of quite a bit of trust law.
Well, chalk this up as another episode in the long drama of Finumus Predicts Poorly.
And let it serve as another reminder not to take anything as anything as gospel from semi-random internet pundits. Me included!
That said, I did hedge my bets in a later article, warning:
Over the long run, I doubt ‘beneficiary’ pension pots compounding tax-free for decades will survive the ‘Someone has £1bn in their pension’ headlines. We’re not America.
But I didn’t think the unravelling would come this quickly…
Pensions join the IHT parade
Starting April 2027, defined contribution (DC) pensions will fall within the scope of inheritance tax (IHT).
While the exact legislation is still to be hammered out, let’s assume the worst. (Generally the best approach to tax policy, especially for cynics).
Labour’s moving of the goalposts is not just a headline grabber. Bringing DC pensions into the scope of IHT creates significant problems, especially for those who’ve been diligently building retirement savings to double as intergenerational wealth vehicles.
Let’s have a quick refresher on how the system presently works.
The (simplified!) current rules:
- Pension assets are outside your estate for IHT purposes.
- On death, assets inside your pension can be passed to beneficiaries, as per your Expression of Wishes.
- If you die before 75, beneficiaries can withdraw tax-free (but they don’t have to – they can instead let the pot grow indefinitely).
- If you die after 75, beneficiaries pay income tax on withdrawals, but no IHT.
This structure has long been a favorite of tax planners for IHT minimisation.
Combining generous tax relief on contributions with tax-deferred growth and IHT-free transferability? It’s a potent cocktail – akin to having your cake, eating it, and then feeding it to your heirs in perpetuity.
But come April 2027, the party’s over.
The New World Order
Under Labour’s proposed new rules:
- Pension pots will face 40% IHT.
- Beneficiaries will also pay income tax on withdrawals, regardless of the original owner’s age at death.
One or the other might have been tolerable.
But both? It’s brutal.
[Editor’s note: The early consensus from Monevator readers is that Finumus’ worst-case scenario is excessively fatalistic. The suggestion so far, they note, is that the income tax regime on inherited pensions will remain the same. This would mean no income tax if the donor dies before age 75. We will not know for sure, of course, until we see the proposed legislation. Please read and add your own thoughts in the comments.]
To illustrate why Labour’s new rules could be so tough, let’s compare some outcomes.
If you start with £100 in a pension, under the current system, your descendants can keep that £100 compounding tax-free forever (as long as they never draw it down).
What about under the new system? Well, that same £100 shrinks to mere pennies over five generations due to compounding taxes.
Changing the rules like this effectively introduces a wealth tax of ~1.33% per year on assets in pensions.
And unlike other assets, pensions are trapped. You can’t give them away to sidestep IHT – or at least you can’t without paying income tax.
I feel another meme coming on…
Meet the victims: Sarah and Stephen
Let’s revisit our fictional friends from my previous post, Sarah and Stephen.
The doughty duo were last seen convincing Sarah’s parents to fund their pensions to the tune of £360,000 to save both IHT and to give them a bit of financial breathing room.
Since then:
- Sarah successfully squeezed £360,000 (gross) into their pensions.
- Their kids, Amelia and Jack, are now at university.
- Stephen netted £1 million from a venture investment.
- Their ISAs and SIPPs have soared in the bull market.
Their net worth (including gross value of pensions) now sits at £7.3m.
If they die tomorrow, their estate would owe £1.58m in IHT. But if they die post-April 2027? That IHT bill balloons to £2.7m. That’s an extra £1m gone to HMRC.
Dinner table drama: a clash of generations and expectations
Over dinner, Sarah unveils the grim numbers to Stephen, her spreadsheet glowing ominously on the kitchen table. Stephen’s initial reaction is one of stoic resignation.
“The kids will be fine,” Stephen says, sipping his wine. “We’ve given them a great education, a leg-up most people can only dream of. They’ve got to stand on their own two feet eventually.”
Sarah isn’t so sure: “Fine? In this economy? You have remembered that they are both studying humanities?”
Sarah reminds him that the cost of housing has ballooned since their own days as scrappy young professionals.
“Even with decent jobs, Amelia and Jack will struggle to buy a home in London unless we help,” she argues. “Add in student loans, higher taxes, and the cost of living – they’ll be working harder for less. And now, a good chunk of what we planned to leave them will be eaten by this new pension tax double-whammy.”
Stephen sighs but doesn’t counter. Sarah has a point. Their £2.7m post-2027 IHT bill could be as much an entire post-tax career’s worth of income for their kids.
That stark figure prompts Stephen reconsider his laissez-faire attitude.
“It’s not about leaving them a pile of money to blow on avocado toast and electric cars,” Sarah presses. “It’s about giving them options – the same options we’ve had. Financial freedom and choices. Security.”
By the end of the meal (and a bottle of wine), the conversation has veered from pragmatic planning to a lamentation of modern Britain.
They reminisce about the 1990s – lower taxes, cheaper houses, rising wages – and wonder how it all went so wrong.
“We’re not just managing money here,” Sarah concludes, a bit teary-eyed. “We’re managing their future.”
A camel through the eye of a needle
As Sarah digs into spreadsheets, she realises their pensions will need to be spent down – flipping their previous ‘pensions-last’ strategy on its head.
This will actually be quite difficult, she discovers as she runs the numbers.
For simplicity, Sarah bundles their SIPPs together and assumes both her and Stephen retire at 55, die at 85, enjoy smooth 3.5% returns, and make no further contributions to their pensions:
If they limit withdrawals to paying basic rate tax, then they’re not going to get it all out.
If they are prepared to go to take a 40% hit though, then maybe they can:
Stephen points out that 30-year gilts have a 5% YTM right now, so Sarah’s 3.5% return assumption is a bit pessimistic. So she plugs that in.
Yeah, they are not going to make it.
They should probably just assume that they’re going to have to pay 45% to get it all out at some point.
What’s the new plan?
For now the couple will:
- Only make further pension contributions if they can effectively achieve at least 50% tax relief. (For example income taxed in the 60% band, or with Employer’s NI via Salary Sacrifice).
- Think about retiring earlier than they otherwise would have.
And in retirement they’ll:
- Prioritise running down pensions as soon as they retire.
- Gift assets from their ISAs and other holdings to reduce taxable estate.
The generational headache: from one tax trap to another
The pension changes don’t just complicate Sarah and Stephen’s plans. They cascade upstream to Sarah’s parents and downstream to her children.
As the family’s de facto CFO, Sarah realises she has to juggle three generations of financial puzzles, each affected differently by these changes.
Sarah’s parents, Mike and Mary, are in their early 80s. Their SIPPs are smaller, but still substantial enough to pose problems.
Sarah’s immediate focus is to get Mike and Mary drawing down as much as they can while staying in the 20% income tax bracket.
“Every pound we can get out now saves Amelia and Jack from paying 40% IHT plus income tax later,” she explains to her increasingly confused parents. “It’s simple maths!”
Then there’s the tricky issue of skipping a generation.
If Mike and Mary’s pensions pass directly to Sarah, they’ll fall into her estate, creating a tax nightmare. To avoid this, Sarah gets them to update their ‘Expression of Wishes’ forms to redirect those funds to Amelia and Jack instead.
But even this has its pitfalls.
“The kids could inherit £420,000 each in their early 20s,” Sarah frets. “That could either set them up for life – or ruin their work ethic.”
Sarah tries not to think about what will happen when their children’s children face the same tax quagmire.
Pensions as poisoned chalices?
As Sarah continues crunching the numbers, she starts to question everything she thought she knew about pensions. What was once the family’s golden goose – a tax-efficient savings vehicle and inheritance tool – now looks more like a poisoned chalice.
Let’s take Amelia’s hypothetical future. By 2030, thanks to Sarah’s strategic planning, both children each inherit sizable SIPPs – say about £600,000 each, boosted by earlier contributions. These balances are enough to provide financial security, but the tax implications loom large.
For example, there’s going to be little point in Amelia making pension contributions once she starts work. (Unless it’s to avoid marginal tax rates of 20,000%.)
If Amelia doesn’t add another penny to her pension but lets it compound at a conservative 3.5% for 35 years, it grows to £2m. At 5%, it hits £3.3m.
A fantastic outcome on paper, clearly. But when Amelia eventually withdraws funds, she’ll face income tax at higher rates. And since she can’t leave her pension untouched for her children (thanks to the new IHT rules) she’ll be forced to draw it down aggressively or see it taxed again upon her death.
This realisation leads Sarah to stop contributing to her children’s SIPPs altogether.
“What’s the point?” Sarah laments. “All we’re doing is building them a tax headache for the future.”
Sarah looks at all this in despair, and she honestly doesn’t understand how this can be not ‘raising taxes on working people’.
She starts to wonder: how bad can five years in Dubai really be?
What do you think?
We’d love to hear what people think of Sarah’s situation. In particular, some practical tips amongst the outpouring of sympathy – or otherwise – would be most welcome.
I’m going to be coming back to wider IHT planning options for Sarah in future posts, and I’ll doubtless be covering: gifting rules, trusts, life insurance, life assurance, family investment companies, and possibly at this rate, emigration. I might even talk about (gulp!) annuities
Of course there’s also policy risk to consider. Sarah might retire early, start aggressively drawing down her pension, pay tax on it, and then see a 2029, Farage-led, Reform / Tory coalition government abolish IHT on its first day in power.
Want to add something to the discussion? You know where the comment are…
Be sure to follow Finumus on Bluesky or X and read his other articles for Monevator.
“Beneficiaries will also pay income tax on withdrawals, regardless of the original owner’s age at death”
Surely that’s not right. The proposal is that inheritance tax is paid on the pension but the beneficiaries don’t pay income tax on the inherited pension if the deceased died before age 75?
I chuckled when I read this part of the article: “Bringing DC pensions into the scope of IHT creates significant problems, especially for those who’ve been diligently building retirement savings to double as intergenerational wealth vehicles.”
Um….that’s the WHOLE POINT of the change!!
IHT is one of the most sensible and worthwhile taxes as it ultimately means people are rewarded for working hard rather than being lucky. From a social & economic perspective (and speaking as someone who has children who are likely to be directly affected by this change also) allowing untaxed intergenerational wealth transfer simply locks in social inequality causing harm to society and inhibiting free flow of funds to where they will do most good/generate growth, while removing incentives to work hard.
In centuries past there were similar issues where ever more vast estates were locked up so that they could only pass to the eldest male child as a single unit and then to the next eldest male child and so on in perpetuity. This caused massive and predictable problems so the law was changed to allow assets to dissipate and this greatly helped the economy. This new change will do the same. It’s a positive change that estates will be better taxed. It means your (and my) children will have to stand or fall on their own merits, rather than whether they got lucky in the grand lottery of parents.
Note it’s also entirely rational for individuals to try and legally reduce their tax, and I have done so in the past (and will do so again in the future, if I can) but I hope (and expect) that the IHT rules will get ever stricter, meaning good luck if you want to plan, especially when futher IHT rug pulls are not only possible but highly likely!
In summary, I am 100% in favour of the change to IHT and it’s simply a shame that Labour didn’t go further (e.g. taxing farms equally).
From a mid 30 year old perspective I can’t say I particularly worry about my pension pot being set aside for my kids and it being taxed heavily on doing so. Presumably the tax free inheritance will still exist on my death and for me my pension is mainly for my (hopefully early) retirement. The fact I’ve been able to stick it in a pot tax free to compound for 30 years is boon enough. If there’s anything left for the kids on my magnificent and dramatic death, then that’s just good luck (or poor planning!)
Seriously?
Perhaps you could explain why ordinary tax payers must pay more tax so little Amelia and Jack can have enjoy an unearned, tax-payer subisidised life of luxury.
Pensions and the tax advantages are to support the saver during retirement, not to establish perpetuating trusts.
Interesting post, that I have only skimmed thus far. Clearly the post deserves much more time & concentration. Having said that, one quick comment re scope:
Annex B of HMG’s consultation pack , see: https://www.gov.uk/government/consultations/inheritance-tax-on-pensions-liability-reporting-and-payment/technical-consultation-inheritance-tax-on-pensions-liability-reporting-and-payment
mentions DB pensions as being in scope in three (IIRC) places!
I agree with Snowman, everything I’ve read suggests the income tax regime on inherited pensions will remain the same, so no income tax if the donor dies before age 75. Of course, we have yet to see the actual legislation.
Also, you talk as though we’ve always been able to pass down pensions in this way – ‘long been favoured by tax planners’. Well, if 8 years is long then yes, but tbh this pensions inheritance wheeze was a product of the 2016 Pension Freedoms. Before that, lump sum death benefits were taxed at 55% I think?
And of course, there was also a lifetime allowance charge to consider until about a year ago. So, not so much the end of a long established mechanism for estate planning, as closing a short lived and probably unintended bonanza. Pension tax relief was never intended to be a gateway to trust funds for the wealthy, but an incentive for people to provide for their own retirement.
Finally, if you leave your pension to charities then it’s IHT free. If you really don’t want any of those tax funded public services getting your money. I didn’t see a mention of that in your list of IHT mitigation measures.
I think that there is a certain “tongue in cheek” tone to this article. All I have to say is that Sarah’s definition of “working class people” and my own are substantially different. I can’t fund much sympathy for her I must admit.
On the positive side, with all the money she will be so desperately withdrawing from her pension pot she might be able to afford some good therapy to come to terms with her drama.
PS: I wish I had Sarah’s problems
There has been no mention at all of the removal of the income tax free status for pensions for those dying before 75 . Such a measure would have been announced in the budget and cannot be introduced now (without another budget !
@all — Thanks for the early feedback. Unfortunately I can’t reach Finumus right now — I expect he’s organising the bailout of some bankrupt Central American country or whatever it is he gets up to in the daytime — but based on the credibility of the commenters here I’ve amended the article to reflect this uncertainty/potential excessively gloomy prognosis for income tax.
@Mariano Korman — Yes, I’d say Finumus is definitely aggrieved about the changes but he’s not completely tone deaf and the article is a bit tongue-in-cheek. Without wanting to speak too much for him, I think he’d say the wider problem is the paucity of ambition and salaries in the UK these days (especially versus the US) and arguably the necessity (especially with house prices) of thinking this way if you can afford to. It’s true the country continues to wade through economic treacle, and the major policy changes of the past decade have only made things worse (especially Brexit of course).
@Jimbob @Brod @Mike — Well basically I agree, my celebration of IHT is notorious among long-time readers. However Monevator is a broad church when it comes to investing and money management.
Moreover as I’ve said before, I consider it good to have Finumus sharing these glimpses of how the 1% are thinking and operating financially, even if it’s not immediately applicable for all readers.
Firstly, because it is for more than you might think (about 1/3 of our readers are additional rate taxpayers, which is very high considering we also skew high on retired), secondly because we can all learn from it, both practically and mindset-wise, and thirdly because it also informs my politics I suppose. 😉
I am afraid you lost any sympathy I might have had at “Stephen netted £1 million from a venture investment.” and “Their net worth (including gross value of pensions) now sits at £7.3m.”
Boo hoo. Is that a tiny violin I hear?
Pensions are for your retirement, not setting up your kids for life.
One would imagine Sarah would make a call to trust and estate practitioner while Stephen talks to an emigration lawyer.
“You have remembered that they are both studying humanities?”
Sarah seems to have a strange (to me) congnitive dissonance that seems common in inheritance discussions – a desire to feather bed the next generation but a defacto plan to give any money too late to be useful. Giving the kids grandma’s inheritance in their 20’s will ruin them? vs how are they going to afford a house? – not by inheriting from their parents when the kids are in their 60’s!
Most of the whining about IHT (including the farmers) seems to just be a desire not to pay tax and not give up control. The next generation would be better served by receiving the funds (or the farm) before their parents shuffle off this mortal coil. As others have mentioned using pensions to avoid IHT is a relatively new and now short lived wease.
Labour has been the biggest disappointment of 2024. High earners are already paying 70-80% in effective marginal taxes (income tax + lost PA + ENIC + NI + student tax + lost childcare + … etc.), subsidising others to live from welfare.
I don’t understand why success is so hated in the UK. Changing the rules mid-game and applying inheritance tax (IHT) retrospectively is a significant motivator for migration out of the UK.
Having just spent the last couple of hours trying to save £50 on my car insurance (don’t knock it – it works out at £25 an hour labour rate), I suspect I don’t have quite the same financial worries as Sarah and Stephen…..
That being said, I probably do know of a couple of people that might be close to that category. Pension buy-out rates of 40x were being offered until quite recently (not personally in the market, so I don’t know about the post 2022 situation), so a couple with moderate final salary pensions each of, say, £30k p.a. could have racked up a joint SIPP value of ~£2.5m quite easily.
Given the fantastical drawdown rates touted by some financial advisers, plus the inheritance possibilities, it would have been very tempting. A bit of luck in the markets (eg S&P 20204) would have seen their SIPP values rocket up.
As a number of commentators have said, this is a nice problem to have, so I don’t have too much personal sympathy.
But…. it is a “problem” that could be affecting more people than one might think, and could apply to high earning teachers, doctors, or even nurses etc.
Thank you @finumus for a most enlightening take on the new regime. Whilst of limited personal relevance (although I keep buying the tickets) I read with great interest from the academic perspective of a spreadsheet geek. Understanding the broadest implications of change can only add value, albeit with covetous enmity towards our hypothetical heroes!
What if someone has money in a SIPP and moves abroad in retirement? What tax would apply in that case (on the UK side)?
Of course the truly rich probably don’t have pensions…
Finumus’ article was quite useful actually. She who must be obeyed will get the ISA and so on but it’s reminded me to keep the value of the SIPP and 1/2 a house (to go to the children) below the IHT limit. It’s a tough job, but somebody’s got to do it…
https://www.harveynichols.com/domaine-de-la-romanee-conti/romanee-saint-vivant-2019-900543-na-146381/?_g
This is great stuff Finumus, entertaining as ever! The whole series you have planned sounds fascinating.
I was just having a little look at the membership of the commenters on this one and wonder whether you’d get less dissent targetting mavens or just moguls? You talk of monevator demographics (@TI #9), wonder if they are further accentuated by membership type? There is a socialist mogul above though so shouldn’t necessarily generalise! And maybe dissent is no bad thing?
Not sure how that works though with posters other than TI/TA, I guess if Finumus isn’t on the payroll then it may be a bit cheeky to paywall it?
But thats absolute supposition on my part, have no idea how Monevator organises that side of things..
Did make me think about ‘goldilocks’ financial planning where you don’t try to optimise too heavily in any one direction (i.e. smashing up SIPPs as IHT planning) as things inevitably change. I’m sort of glad now that I didn’t prioritise the SIPP uber alles but still kept the ISA ticking over.
I look forward to the passing of The Pensions Protection (Pension Scheme for Sir Keir Starmer KC) Regulations 2026 which will, unusually, allow Sir Steir Kleir to trade in some or all of his DB pension for a DC pension which will be exempt from the proposed new IHT laws.
I mean, why not? The precedent is already set. Two-tier pensions.
https://www.legislation.gov.uk/uksi/2013/2588/introduction/made
‘Pensions are meant for your retirement, not for setting up your kids for life.’ That’s got to be the most absurd comment I’ve heard this week. That’s the mindset of someone who has nothing and resents those who do.
I suppose at least I no longer need to spend a year dead at 74 for tax purposes…
Entertaining article: I find it very hard to work up any real anger about the principle of potentially very large DC pot, which I have been able to build up ENTIRELY TAX FREE as a way of encouraging me to make provision for my future wellbeing, being subject to taxes if it is passed on to my kids or grandkids, when my future has run out. In the days of DB pensions, or compulsory annuities, they disappeared in a puff of insurance company profit on death (or survivor’s death) – so we are only back to where we were a couple of decades back.
My SIPP will hopefully never run down to zero, which automatically makes me ‘broad shouldered’ – I can always withdraw more, pay higher rate tax, and gift it to my descendants, or take them on a fancy holiday – I will, probably maybe, have options that most people won’t.
I handle my fairly elderly mother’s financial affairs – I really began to question my principles when I started to include IHT consideration into where she should draw down from. This move at least removes that morality challenge too!
I punched the air and whooped when nothing happened to TFCLS and annual contribution and lifetime allowances in the budget – that might have drawn a very different response from me.
(I’m generally right of centre but pretty centre voter – don’t like tax much, and I pay quite a lot of it, but I also like to live in a vaguely functioning country)
I agree with others that situation with regard to income tax is seemingly unchanged. Albeit we need to see the legislation. I also think we may see challenges to the legislation. People are already arguing that trust law needs to take precedence etc.
This is creating a lot of unhappiness. Given the massive run up in assets prices there are some very large DC pension pots floating around, many well into eight figures. The abolishing of the LTA got those people very excited about the ability to leave that to their kids tax free, possibly with perpetual
gross roll-up.
Personally, I’m not too grumpy about the fact I cannot pass on the whole pension tax free to anyone. The whole point of pensions is tax deferral, not tax avoidance. Plus I’ve always intended for the kids to get the money in their 20s, not when I drop dead. Moreover, I’ve been careful not concentrate too much net worth into onshore pensions. It was always vulnerable. Instead, I’ve diversified into other types of wrapper, placing higher returning assets into those.
Where I agree with the OP is that this will create issues in terms of both sequencing. It seems sensible to start drawing down the pension as soon a feasible. Right now, I’d find it impossible not to be paying HR or AR tax on parts of the drawdown. Realistically though, that was always my base case. If I buy an annuity this is probably now the place to do it since if I drop dead early it’s a 40% haircut on the pot anyway.
What I would say though is you want to stay nimble on this. Pension rules have been a political football for decades. I could easily see LTAs brought back. Tax free sums abolished. I could also see the opposite under a more rightwing govt. Labour could easily be a one term govt since their majority is mostly a function of FPTP and the split in the right wing vote.
Thanks for this. Lots of food for thought!
Noticed, in case of interest, that HMRC’s consultation on the proposed changes has a useful case study of how it might work in practice for DB schemes (there are other examples covering DC schemes of course):
https://www.gov.uk/government/consultations/inheritance-tax-on-pensions-liability-reporting-and-payment/technical-consultation-inheritance-tax-on-pensions-liability-reporting-and-payment#part-2-inheritance-tax-on-pension-funds-and-death-benefits
Seems any charge is pro-rated so estate and pensions share in benefit of nil rate band.
As the post points out, all subject to what final legislation says, so nothing certain yet.
You already lose 32%, 42% or 47% today on money earned before you can put it in to an ISA, and another 40% of the residual in your ISA if you die before spending it.
So at the end of the day, for higher or additional rate earners with very large pots (those that won’t be withdrawing at 20% marginal tax anyway), what this really does is put ISAs and pensions on an _even footing_ (i.e. you’ll pay income tax to use them one way or another, they’re both subject to IHT, you get tax free growth in both)
If your ISA allowance is gone then a pension is still your best option.
Annuities have actually become uniquely attractive again also, as the capital is ‘spent’ and the annuity income is immediately outside of your estate
“how bad can five years in [insert] really be?”: This is your answer. Move tax residence and domicile to a jurisdiction with low (or no) income tax rates, no or low IHT and no or low CGT. Make sure it has no double tax treaty with the UK giving the UK taxing rights over UK source pension income (as I think low flat tax rate Bulgaria does, but low flat tax rate Bosnia does not). For those about to say it’s too hard to move country, well you can’t reasonably expect to stay in the UK and still get to eat your cake.
So tedious reading the commie/socialist nonsense from the usual left-wing incompetents. We need to ban left-wing politics altogether or at least penalise it. Socialism is a failed experiment that has caused endless suffering and people need to be held accountable for this. Maybe we could tax all socialists at 90% (as they love high tax) and see how they get on. Meanwhile the rest of us can have actually spend, grow the economy and help our kids.
This new legislation will remove the freedom to pass the heard earned funds to the next generation. Not to make them lazy, but provide meaningful help. Our lives may have turned out less fretful if we had more financial support when young. Moving abroad may well be a solution, but that will lead to loss of social capital, at a time when it is most needed (in retirement). Having said that, any ideas of jurisdictions that can be accessed would be useful.
If someone wants to help their children, why not do it when it’s most welcome rather than making them wait until they die. As was mentioned above, tax on pension contributions is deferred, not removed completely. Hence IHT is perfectly reasonable.
As for my comment about the purpose of pensions being to fund retirement, well the clue is in the name.
Whilst I don’t have the answer, it feels harsh to bring it into the estate and maybe some concession could be made rather than making pensions unviable for those with hefty sized estates.
One thing to not rule out is further tinkering and whilst the toothpaste may not go back in the tube it wouldn’t be unthinkable to see this reversed. Therefore there will be an element of hedging your bets.
All of this is damaging for pensions as a whole as it undermines the “deal” and shows that policital football can be played with your nest egg.
I would have prefer to see pension have their own NRB or an allowance of some sort but I’m glad I’m not the one making the rules!
I did see something like this coming at some point. It had always seemed a glaring anomaly that there was no LTA test on death, so I suspected that might be introduced. I briefly celebrated the abolishment of the LTA and even more so when Reeves said that Labour would not reintroduce it, but then quickly surmised that something even more draconian would likely come along. I thought there may be a flat 40% charge on passing on a DC pension pot to anyone other than a spouse, civil partner or charity, as there used to be before Osborne’s reforms. As it turns out, charging IHT is not quite so draconian, at least for some people, as the nil rate bands can be apportioned between pension and non-pension assets. That is the current proposal, but may not make it to legislation as it makes life more complicated for executors and pension providers.
The introduction of IHT on SIPPs hit our current plan very hard. We never expected to spend it all, but it was kind of reassuring that we would have the money there should it be needed to pay for expensive care, even though it would mean paying above basic rate income tax to access. We do however have an IHT mitigation strategy, and not one that involves turning our lives upside down moving to some hell hole for 5+ years just to save a bit of tax. The mitigation strategy is straightforward, but isn’t one that will appeal to those who consider one’s only worthy beneficiaries to be direct descendents…
Mrs Details Woman and I were discussing this the other day. She is preparing a submission to the consultation (she is a pensions lawyer and I, for a number of years, worked in the pensions industry).
What I think we both agreed on is that the proposal is an absolute shambles. It will be an administrative nightmare to deal with (I won’t bore you with details, but I am happy to share). It’s pretty much universally agreed in the industry that ‘this is a bad idea’.
So whilst it is complete conjecture on our part, I would imagine there will be significant changes to the proposals following submissions. Our gut feel is that the most sensible way forward would be a flat rate tax on all pension assets on inheritance (i.e. non-exempt passing of the estate), possibly with say a floor of £xk per pot being exempt.
That would achieve the aims of the current proposal (to replace the LTA wealth tax / remove pension assets as an IHT dodge) but not cause the clusterf*ck that would happen if the current proposal comes in to being.
So what I’d say is, let’s see where we are in a year’s time on this.
Fantastic article as always Finumus! Thank you. And your thinking is spot on. I am eagerly awaiting your follow up posts on IHT planning options: gifting rules, trusts, life insurance, life assurance, family investment companies, and emigration. On the latter I believe that as of April 2025 the UK will transition to a residence-based IHT system. Individuals who have been UK residents for 10 out of the previous 20 tax years will be subject to UK IHT on their worldwide assets, regardless of their domicile status. So 5 years abroad may not be enough.
…The mitigation strategy is relatively straightforward:
1) make large withdrawals from our SIPPs and give the money away. Most of the money will go to nieces and nephews as our own kids have already be sufficiently pampered.
2) Bring forward charitable donations. In our case we will give ETF investments held in GIA accounts to charity. This has the additional benefit of defusing the CGT gains on these assets. Essentially the charities get the CGT instead of HMRC.
Gifts to charity increase your personal allowance. This can reduce tax liability to basic rate, or even eliminate income tax entirely. We would seek to reduce our income tax to basic rate.
We will implement this over several years which should establish the gifts as gifts from income and so not PETs.
Downsides are that I am sure some of the money going to beneficiaries will be used in a manner we would like and we will be around to witness that. One nephew is an alcoholic and we really need to think carefully about the best way to help him. We haven’t spoken to his parents yet, but I suspect they will say giving him money may increase his problems rather than reduce them. It might be better to help his kids (teenagers) directly, but again complicated and likely to cause other problems and resentment.
On the other hand most nephews/nieces will definitely benefit and use the money well. Hopefully the benefit will be greater having the money earlier instead of inheriting in their 60s.
Another downside is that our very comfortable SWR will inevitably rise. We will mitigate some of the additional risk by buying annuities.