Last October saw Labour’s first Budget in 14 years and the first ever to be delivered by a female chancellor. Despite Keir Starmer’s decisive election victory, Rachel Reeves’ “painful” budget has proved controversial, with business owners and farmers hit particularly hard.
While the overall consensus appears to be that it “could have been worse”, one change to pensions and Inheritance Tax (IHT) was particularly significant. But it’s also important not to overreact and make emotional, knee-jerk decisions.
Keep reading to find out more about the announced change, when it is due to come into effect, and how it might change your long-term plans.
The Treasury’s IHT take is already on the rise
Despite often being referred to as Britain’s “most hated tax”, only around 4.4% of all UK deaths in 2021/22 resulted in an IHT charge, according to HMRC data.
The government’s tax take from IHT is on the rise, though, largely due to frozen thresholds.
The “nil-rate band” is the amount below which your estate won’t be liable for IHT. It has stood at £325,000 since 2009 and the chancellor used her Autumn Budget to extend this freeze until 2030. The “residence nil-rate band” can be used when passing your main residence to a direct descendant. This was introduced in 2017 and is also currently frozen until 2030, at £175,000.
With allowance frozen and the value of assets and house prices rising, the number of estates exceeding the thresholds has been increasing in recent years.
IFA Magazine confirms that the Treasurys IHT take amounted to £6.1 billion in 2021/22 but is set to exceed £8 billion for 2024/25.
Alongside confirmation of the extension to threshold freezes, the Autumn Budget also included an announcement that will see the Treasury’s IHT take rise even higher in the coming years.
Reeves announced a change to the IHT treatment of your pension
Following the Budget announcement from chancellor Rachel Reeves, from April 2027, your pension could fall into the net for IHT calculations. Some experts have suggested that the move could “disincentivise retirement saving” and it may have an impact on your wider estate planning.
Current rules allow for unused pension funds to be passed on to a chosen beneficiary tax-free if you die before the age of 75. On death after age 75, unused funds can still be passed on but tax is payable at the highest rate your beneficiary pays.
It’s worth noting that you appoint a pension beneficiary using an “expression of wish” form, via your pension provider rather than through your will.
These current rules have led to pensions being seen as a sanctuary for IHT. Previously, if you could afford to, it was possible to use non-pension income to fund your retirement while leaving some or all of your pensions untouched as an inheritance.
It is this “loophole” that Rachel Reeves has opted to close, with changes due to come into effect from April 2027.
Advice can help to ensure that your plans remain on track, whatever government changes are announced
The key to successful long-term financial planning is a combination of patience, unemotional decision-making, and a focus on your ultimate goals.
Advice can help to provide reassurance, a guiding hand, and suggest tweaks to your plans if external events or life events mean that changes are required.
Here are some important things to remember about Rachel Reeves’ recent announcement.
1. A consultation is still required
The change isn’t due to come into effect for another two years and is still to be consulted on. A knee-jerk reaction now, especially one that doesn’t align with your plan or long-term goals could have a serious knock-on for your retirement so stay calm.
2. Your pension pot will provide your income in retirement
Remember that the primary reason you have saved into your pension pot is to provide yourself with an income in retirement. Your pension is tax-efficient, but when money is going in and coming back out so budget to use pension income to fund your retirement and focus on the type of lifestyle you want to live.
3. Your estate planning is an ongoing process
We can help you to think about your inheritance and legacy planning but remember that your estate planning was never meant to be static. Life events and milestones can change your priorities and mean that your plan is always evolving.
We can help you to think about the best ways for you to pass on money to those you love, based on your individual circumstances and goals.
Get in touch
If you have any questions about your long-term retirement plans, speak to us now. Get in touch by emailing hello@fingerprintfp.co.uk or calling 03452 100 100.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
