At the Autumn Budget the Chancellor announced plans to remove the exemption which allows unused pension funds to be inherited tax free.
Currently, if a pension holder dies before the age of 75 their beneficiaries can generally inherit the remaining funds tax-free, whether as a lump sum or as income. If the deceased is 75 or older at the time of death, the inherited pension will be taxed at the beneficiary’s marginal income tax rate.
From April 2027, HMRC has proposed that most unspent pension pots will be subject to inheritance tax (IHT) at 40% regardless of the age of the deceased, unless the pension is passed to their spouse or civil partner.
Bringing unused pension pots into the scope of IHT will also mean that their value will count towards the IHT threshold, which the Chancellor confirmed will be frozen at £325,000 for a further two years until April 2030. Many more estates will be brought into IHT as a result of this change.
Further, if the pension holder dies aged 75 or older, the inherited pension will (as currently) also attract income tax at the beneficiary’s marginal rate. Without careful planning, this could result in a marginal rate of up to 67% if the person receiving the pension is an additional rate taxpayer.
If you have carried out succession planning based on the current rules, we recommend that you seek advice from a pensions expert or independent financial advisor if you think you may need to re-evaluate your options.