Changes announced to pensions in the recent budget

One of the biggest shocks from Labour's first Budget came when Chancellor Rachel Reeves announced that pensions would become subject to inheritance tax (IHT). This change reverses the decision by George Osborne in 2015, which exempted pension pots from being considered part of an estate. Although the change will not take effect until April 2027, many of our clients were initially so concerned that they considered withdrawing funds in a 'knee-jerk reaction' to move the money elsewhere, gift it, or spend it!

or now, our advice is to 'keep calm and carry on,' as nothing has changed yet!

Here are some concerns raised along with our initial thoughts (note that things may change before the legislation is passed):

**Q1) Will my wife or husband be able to inherit my pensions without paying IHT?** 

**Answer to Q1:** Yes, your spouse or civil partner will inherit your pensions without incurring IHT under the usual 'spousal exemption' rules. However, if you are not married or in a civil partnership, spousal exemptions will not apply, and you may need to seek advice.

 

**Q2) Will dying before or after age 75 make any difference after April 2027?** 

**Answer to Q2:** The income tax treatment will not change. If you die before age 75 from a SIPP or personal pension, no income tax will be paid by the beneficiary on withdrawals. If you die after age 75, your beneficiaries will pay income tax on any withdrawals at their marginal rate. In both scenarios, some beneficiaries may see the pension pot reduced due to IHT, plus their own marginal rate of income tax, resulting in double taxation.

 

**Q3) Should I take the full amount of tax-free cash because I am worried it might disappear?** 

**Answer to Q3:** Tax-free cash remains unaffected (still 25% of the value of a SIPP or pension, unless you have protection or protected tax-free cash). Some clients use tax-free cash as part of an income drawdown strategy to reduce income tax in retirement.

 

**Q4) I am concerned about potential IHT for my children and grandchildren. Is there anything I can do?** 

**Answer to Q4:** Since the rules are not changing until April 2027, there is no immediate action required. The best course of action for you will depend on your personal situation, and you may need professional advice. Options like gifting, trusts, and other specialized investments could help in protecting against IHT.

 

**Q5) Should I consider changing my Will?** 

**Answer to Q5:** Mirror wills are a common way to ensure that a spouse and then your children benefit upon your death, especially in cases of marriage or civil partnerships. However, for blended families or more complex situations, mirror wills may not be the best option. It is important to review your will. Additionally, you should update your Expression of Wish (nomination forms) regarding your wishes for your pensions upon death.