Financial Planning just became a lot harder from April 2027.
Prior to that date (and since April 2015) pensions are still exempt from IHT. This means that we have been able to work with clients’ non-pension assets to provide them with tax efficient capital withdrawals to fund their lifestyle. The aim was to spend that money by the time they died, leaving behind a largely IHT exempt property and a totally IHT exempt pension pot.
If we over shot on spending the non-pension capital, no problem as we could use the pension as the Plan B and start spending that.
The 2024 budget changed all of that by bringing pensions back into your estate for Inheritance tax from April 2027. As with all changes this can be dealt with, but it does mean that the planning will have to be more precise now.
The aim from 2027 is going to be to spend and gift all of the capital away and die with just the mainly IHT exempt property left.
The problem with this plan is that pension withdrawals (above the 25% tax-free amount) are taxed to income tax. For clients who are already higher rate taxpayers in retirement this is simple, 75% of what is withdrawn will have 40%-45% income tax deducted (or 60% on some income due to the UK’s insane income tax rules). This is easy to work out and the calculation just needs to be made as to whether it is better to pay 40% income tax now and do something with the cash which means no 40% Inheritance tax later or no income tax now and definitely 40% Inheritance tax later plus possibly another 40% income tax for the beneficiaries when they draw the money.
As the meerkat says ‘Simples’.
Where it gets more complicated is where a client is not a higher rate taxpayer in retirement. Here the planning needs to get more precise than it has been for the last decade. Retirement income from other sources (state pension, final salary pensions, rent, dividends and interest) will have to be calculated/estimated for each tax year and a pension withdrawal organised to match the difference between that number and the next tax threshold.
In the UK each person can have up to circa £50,000 per year before they start paying higher rate tax. This means that income producing assets might need to be moved between spouses to the one with the smaller pension pot and pensions withdrawn unevenly depending on who has headroom in their income tax allowance. Once that is done, a calculation is needed to see if withdrawals at this level are going to erode the pension funds fast enough, not to mention the consideration needed as to what to do with the money.
Very much not ‘Simples’.
The one silver lining is that HMRC allows genuinely surplus income to be gifted away immediately exempt from IHT and so generating additional pension income (if not needed to support expenditure) can be given either to a Surplus Income Trust or directly to family members. It might be a good idea to give it to children and grandchildren for them to pay into their pensions (thereby reclaiming some or all of the income tax paid).
If you want an adviser who can work through this, please do contact us. We currently advise clients on inheritance tax, pensions and retirement planning from our offices in Hook, Hampshire and nationwide using the latest technology.