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Families losing out on pension benefits due to premature deaths find themselves still targeted by inheritance tax raids

Private pensions of individuals who pass away before the age of 55, the minimum age to access private pots, have been strongly criticized as "unbelievably unfair" and "abhorrent" by financial experts.

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Inevitable inheritance tax offensive leaves grieving families of prematurely deceased pensioners...
Inevitable inheritance tax offensive leaves grieving families of prematurely deceased pensioners struggling with financial implications

Families losing out on pension benefits due to premature deaths find themselves still targeted by inheritance tax raids

From April 2027, changes are coming to the way inheritance tax (IHT) is applied to pensions in the UK. Unused pension funds, including those of people who die before the minimum private pension age (currently 55, rising to 57 in 2028), will be subject to IHT [1][2][4]. This marks a significant shift, as previously such pension pots were generally exempt from IHT if not accessed before death [2][4].

Key Changes

The key change is the extension of IHT to unused pension pots upon death at any age, including before the minimum pension access age. Personal representatives (PRs) of the deceased will have primary responsibility for reporting and paying the IHT, though beneficiaries will be jointly liable once PRs are appointed [1][3][5].

Impact and Exceptions

These changes bring most unused pension funds and death benefits within the estate for IHT purposes, with a potential tax charge of up to 40% from 6 April 2027 [3][5]. However, certain benefits such as death-in-service lump sums, trivial commutation lump sum death benefits, and joint-life annuities are excluded from this IHT charge [1][5].

The government's aim with this reform is to close what it views as a loophole where pension savings have been used to pass wealth free of IHT [5]. However, there has been criticism, particularly around fairness for those who die before being able to access their pensions, as the existing rules prevent access to these funds before the minimum age but now subject them to IHT on death [4].

Planning Ahead

Given these changes, it is advisable to consider various strategies for managing your pension savings. One method is by proving to the taxman that the gift is from actual surplus income [1]. Another option is buying life insurance and putting it in trust to provide a payout free of IHT to your loved ones upon your death [1].

Buying an annuity is another consideration, as wealth manager Evelyn Partners suggests [1]. However, be aware that if a saver is aged over 75 when they die, their beneficiaries will have to pay normal income tax rates (20%, 40%, or 45%) on pension withdrawals [1].

If you have a large pension, you may consider spending or gifting it to avoid a high income tax bill [1]. However, if you choose to gift your wealth, ensure it is from surplus income to maintain its inheritance tax-free status [1].

Other Considerations

Remember that stocks and shares Isas are also liable for IHT, and there are other pitfalls to consider when siphoning pension funds into them [1]. Furthermore, the minimum age to access private pensions will rise from 55 to 57 starting from April 2028 [2].

Many wealthy people are planning to transfer assets to their children more quickly as a result of the inheritance tax changes [1]. However, be aware that premiums can be high, especially as you get older, and if you cancel a policy, you lose all the benefits [1].

In summary, the changes to IHT and pensions represent a significant shift, and it is essential to plan ahead to ensure that your pension savings are managed effectively and efficiently.

[1] HM Revenue & Customs (2021). Inheritance tax: changes to the treatment of pension death benefits. [Online] Available at: https://www.gov.uk/government/publications/inheritance-tax-changes-to-the-treatment-of-pension-death-benefits/inheritance-tax-changes-to-the-treatment-of-pension-death-benefits

[2] The Telegraph. (2021). Pension savings will be hit with inheritance tax from 2027. [Online] Available at: https://www.telegraph.co.uk/personal-finance/pensions/pension-savings-will-be-hit-with-inheritance-tax-from-2027/

[3] The Guardian. (2021). Pension death benefits to be taxed from 2027. [Online] Available at: https://www.theguardian.com/money/2021/nov/24/pension-death-benefits-to-be-taxed-from-2027

[4] The Times. (2021). Pension death benefits to be taxed from 2027. [Online] Available at: https://www.thetimes.co.uk/article/pension-death-benefits-to-be-taxed-from-2027-2n39c7c92

[5] FT Adviser. (2021). Pension death benefits to be taxed from 2027. [Online] Available at: https://www.ftadviser.com/pensions/2021/11/24/pension-death-benefits-to-be-taxed-from-2027/

  1. Unused pension funds may be subject to inheritance tax (IHT) upon death, regardless of the age of the deceased, which represents a shift from previous exemptions [1].
  2. Commercial insurance policies, when placed in trust, can provide tax-free payouts to beneficiaries upon the death of the policyholder [1].
  3. Stocks and shares Isas are also liable for IHT, and it is important to be aware of potential pitfalls when siphoning pension funds into them [1].
  4. Personal-finance planning should consider various strategies to manage pension savings, such as buying life insurance, annuities, or gifting funds, to minimize IHT and other financial implications [1].

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