From the 6th April 2027, the sacred pension pot that had previously been untouched by inheritance tax, will now be treated very differently. It is important that you understand and review your retirement plans so that your estate is not left with a hefty inheritance tax bill.
The changes announced in October 2024 Budget to the inheritance tax treatment of the pension was met with much resistance. Many have buried their head in the sand and some are holding their breath, however with only a few months to go until the 6th April 2027, it is unlikely that this proposal will not go ahead and therefore it is important to familiarise yourself with what this will mean for you.
What is being affected by the proposal?
It is important to separate fact from fiction. HMRC will not be knocking on pensioners’ doors taking away their pensions from their very purse.
The reality is that when a person passes away, any unused pension and pension death benefits will now be included in the estate for the purposes of inheritance tax calculations.
What this will look like in practise?
Most pension providers work under a trust and the trustees determine who will benefit from the pension. This will continue.
What will change is that once the pension provider determines who the beneficiary of the pension pot will be, the pension pot will then be “vested” in that beneficiary. The unused pension value will now be included in the estate for inheritance tax purposes.
Both personal representative and the beneficiary of the pension pot will then be both jointly and severally liable for any Inheritance tax attributable to that pension.
Who will need to pay the tax?
The personal representative will need to report and arrange to pay the inheritance tax.
In practice, the pension provider will be able to pay the tax directly to HMRC provided certain procedures are followed.
The personal representative will need to act quickly to ensure that the pension providers are notified and that they do not release the pension to the beneficiaries, without the inheritance tax being paid, otherwise it could become difficult to get the amount back from the beneficiaries.
The double tax threat
There is also the likelihood that there will be income tax payable by the beneficiary receiving the Pension pot if the person who died was 75 years and over.
Exemptions
Not all pensions have been charred by the new legislation. There are exemptions, the most obvious ones are any pensions left to spouse or charities.
What should you do?
It is important to review your pension and speak to a financial advisor to see whether you need to update your pension and your savings. If you are a personal representative and need assistance with dealing with an estate that has pensions and you are unsure of what to do, please do reach out to our team and we can guide you.
Call us on 0161 930 5151, email us at enquiries@gorvins.com, or fill in the online form.