Are Pensions Best Avoided At Death?

The 2027/28 inheritance tax (IHT) treatment of pensions raises some difficult questions about the balance between retirement income planning and IHT planning.

The use of pensions in estate planning has been upended by the Budget announcement that, from 2027/28, pension death benefits will be included in the value of the estate for IHT purposes.

What should those who have hitherto earmarked pensions purely or primarily as IHT-free bequests now do, assuming they expect to be alive on 6 April 2027?

Tax free cash

If the PCLS has not yet been taken, it makes no sense to leave this beyond age 75 once 2027/28 arrives and it may be sensible to draw cash now.

After 5 April 2027, there will be an IHT charge as well as the existing 75+ beneficiary’s income tax charge on any unused pension funds remaining at death.

The case for drawing the PCLS immediately is that it could be gifted outright and would then escape IHT if the donor survives seven years. If there is a reluctance to make an outright gift and/or income is required then Discounted Gift Trusts, Business Relief (BR) schemes or some other IHT mitigation could be put in place. In the right circumstances, life cover under an appropriate trust could also play a role in meeting the increased IHT liability that the pension fund generates.

Even if the PCLS is simply withdrawn and left in the estate until death, this is better than leaving the fund fully intact past 75, because of the income tax savings.

Taking income: ISA or pension?

Different answers depend upon varying just one assumption. The hard truth is that different combinations of estate/pension proportions, available NRBs, personal tax rates, beneficiary tax rates, investment returns and investment period will yield different results. There is no one-size-fits-all rule.

Take individual, indepenedent advice.

If you are concerned about how the Autumn 2024 budget may impact your personal situation, get in touch for a no-obligation initial chat to see if we are able to help review your existing plans. Call 0117 3636 212 or email office@haroldstephens.co.uk.