Inheritance Tax (IHT) is often discussed in estate planning, especially when it comes to pensions. However, the reality for most people is that IHT on pensions is unlikely to be a major concern, simply because their pension funds aren’t large enough to create significant tax liabilities.
The overstated fear: IHT on pensions
For the majority of individuals, the value of their pension pots does not reach a level where IHT becomes a serious issue. While it’s true that pension funds are set to become subject to IHT for many people starting in April 2027, this won’t apply to everyone.
For many, pension funds will remain well below the IHT thresholds, and thus, IHT on pensions won’t be relevant.
Furthermore, if pension funds are directed to a spouse or civil partner, they will remain exempt from IHT.
So, while the upcoming changes are important to note, it’s essential to keep perspective. The majority of people are unlikely to have pension funds large enough to trigger IHT.
Why this not a major concern for most.
Average Pension Pots: The average pension pot in the UK is still far below the level that would trigger significant IHT. For many, their pensions won’t even come close to reaching the IHT threshold.
Spousal Exemption: Even if you have a large pension pot, the spousal exemption means that if you pass your pension on to a husband, wife, or civil partner, it will be free from IHT regardless of its size.
Other Wealth Sources: Many people have more of their wealth tied up in assets like property or savings, which are more likely to be impacted by IHT than their pension funds.
What should you focus on instead?
While it’s essential to stay informed about the changes to IHT rules for pensions, the bigger picture is likely to be about your overall estate planning:
Review Your Full Estate: If you’re concerned about IHT, it’s your entire estate — not just your pension — that should be reviewed. Consider all assets that could be subject to IHT, such as property, savings, and investments.
Maximise Your Pension Pot: Rather than worrying about the small chance that your pension will be subject to IHT, it’s far more beneficial to focus on growing your pension savings. Remember, pensions offer tax relief while you contribute, and they can provide a stable income during retirement.
Trusts for Larger Estates: For those with more substantial estates, trusts remain a powerful tool for managing IHT liabilities. Using trusts effectively could provide flexibility and allow you to control how your wealth is passed on.
Keep things in perspective.
While the prospect of IHT on pensions after 2027 may be a valid concern for some, for most people, it’s an issue that likely won’t ever materialise. It’s more important to focus on growing your pension savings and preparing your overall estate plan rather than overemphasising IHT risks from pensions.
If you’re unsure about how these changes may affect you, or if you’re looking for advice on tax-efficient estate planning, we’re here to help guide you.