As many of you will have seen or heard from last week’s Budget, the Chancellor will now bring the vast majority of pension schemes within the scope of Inheritance Tax from April 2027. This measure could have far wider reaching ramifications once the details are known than many will initially perceive.

Let us start by reminding you of the rules as they stand up to April 2027.

Current Pension rules (up to April 2027)

Where pensions are written into trust, which is the case with the vast majority of pension funds, the pension may pass direct to the nominated beneficiaries without being taken into account as part of an individual’s estate for Inheritance Tax purposes. In other words, the undrawn pension fund passes free from Inheritance Tax. Where the individual dies before the age of 75, the beneficiaries may withdraw the residual pension tax free. However, where the individual dies after the age of 75, the beneficiaries will be subject to Income Tax as funds are withdrawn.

Proposed Pension changes (from April 2027)

The proposed changes from April 2027 paint a potentially ugly scenario for individuals with even modest pension savings. Not only are they to bring the pension savings within the scope of Inheritance Tax, which will potentially impact the availability of the Residence Nil Rate Band for individuals with combined pension and non-pension assets, the consultation document published last week also appears to confirm that where an individual dies after the age of 75, the beneficiaries will still be subject to Income Tax on any withdrawals from the inherited pension.

This effectively results in a double tax charge after the age of 75 which, even in relatively modest scenarios, will result in more than 64% of pension funds being lost through a combination of Inheritance Tax and Income Tax where individuals die after the age of 75.

What will the Pension changes mean?

In the most extreme scenario, this combination could potentially lead to in excess of a 100% tax raid on your pensions meaning that your beneficiaries would unbelievably be better off if you did not have any residual pension savings. We should state that this only arises in very limited circumstances via a combination of the abatement of the Residence Nil Rate Band, the allocation of Inheritance Tax liability between the pension and the residual estate, and the top rates of Income Tax for the beneficiaries where individuals die post 75.

With these levels of taxation, there will also be significant impacts on self-invested pension plans and small self-administered pension schemes who often own business assets utilised in the members business. It remains to be seen whether such assets held in pension schemes may benefit from any Agricultural Property Relief or Business Property Relief, but given the illiquid nature of such assets, this will still cause problems for both the pension schemes and the businesses when trying to raise funds to pay resulting Inheritance Tax liabilities as pension schemes are only permitted to borrow up to 50% of the total fund value.

With pension schemes being among the largest shareholders of the UK’s biggest companies, it will be interesting to see how people and the economy will react to these changes from April 2027 once the full ramifications are understood.

Individuals will need to consider their options carefully with both their tax advisers and financial advisers to establish how best to plan for their future in light of these forthcoming changes.

Get in touch

If you are concerned, or would simply like to discuss how these proposed changes may effect your pension plans, please do not hesitate to get in touch with your usual contact here at Wheelers who will make sure your enquiry is directed to one of our experienced Tax Consultants.