When planning for retirement, your focus is likely on building a comfortable future. But what happens to your pension after you pass away? More importantly, could inheritance tax (IHT) impact how much of it you can pass on to your family?
With the government announcing changes to pension taxation in the latest Autumn Budget, it’s important to understand how these rules could affect you and whether you need to take action.
What is inheritance tax, and who does it affect?
Inheritance tax is a charge on the wealth and assets you leave behind. It applies to the total value of your estate – including property, savings, investments, and valuable possessions – after you pass away.
The standard IHT rate stands at 40%, charged on any portion of an estate exceeding £325,000. However, if you pass your home to direct descendants, such as children or grandchildren, the threshold increases to £500,000.
Until recently, pensions have largely been exempt from IHT, making them a tax-efficient way to pass on wealth. However, that is set to change, meaning future retirees may need to rethink their estate planning strategies.
How the Autumn Budget changes impact pensions and IHT
In the 2024 Autumn Budget, the Chancellor announced that from 2027, pensions will be included in IHT calculations. This means that if the total value of your estate, including your pension, exceeds the IHT threshold, your beneficiaries could face a tax bill on the amount above the threshold.
Previously, pensions could often be passed on without inheritance tax, making them a practical way to support loved ones financially. But with these new rules, people who had planned to leave their pension untouched may need to rethink how they manage their savings.
Whether these changes will affect you depends on your financial situation. If the total value of your estate sits below the IHT threshold, there may be little cause for concern.
However, if your assets exceed this limit, it might be time to review your financial plan to minimise potential tax liabilities.
The importance of seeking professional advice
Understanding how IHT affects your pension can be complicated. With these recent changes –or any future changes in pension policy – seeking professional advice has never been more crucial.
With the right approach, you can make informed decisions about your retirement savings and ensure they are used in the best way for both you and your family. An independent financial adviser, such as those at My Pension Expert, can assess your situation and explore ways to manage your pension effectively in light of the new rules.
Whether that means adjusting how you access your pension or considering alternative ways to structure your estate, expert guidance can provide clarity and confidence in your financial future.
If you’re unsure how these changes might affect you, speaking to a professional now can help you take control of your retirement finances and make decisions that suit your needs.
