Pensions and Taxes Following the Autumn Budget

At the budget in October the government announced that they will be bringing in changes so that pensions will be included within a person’s Estate for Inheritance Tax purposes. This is a very radical change, and upturns what has been the case since Inheritance Tax was introduced.

Nevertheless, the plans (which are at a very early stage) do not seem to include Defined Benefit Schemes. i.e. if you are fortunate enough to have a Public Sector Pension or a Private Defined Benefit Scheme, you will be unaffected, because you have no pension pot in the same way as those with Defined Contribution Schemes.

Instead, it appears that the government is planning to tackle only Defined Contribution Schemes, where you actually have a pension pot. The government has so far announced that it plans to make the Pensions Trustees responsible for the payment of tax, however, this is likely to be complicated because they will not know if Inheritance is payable (or how much should be payable) without seeing the rest of the Estate of the Deceased and relying upon the information given by the Executors.

Many in the tax industry are questioning how exactly all this is meant to work and the administrative burdens placed on the pensions industry are not inconsiderable.

That is why many are calling for a pensions nil rate band to be introduced so that smaller pensions can be ignored altogether, and I suspect that this will have some traction. A lot of people within the Private sector will be disappointed that their pension pots will be taxed upon their death; whereas many people within the Public Sector who have substantial pensions are not.

The government is undergoing a consultation project regarding these changes, and until it is complete, we have no idea what the final situation will be. We have nothing in black and white except for the government’s idea. Therefore, to attempt to advise anyone on what to do is likely to be premature at this stage. There has got to be a chance that this will be reversed before 2027 given how far Labour have dropped in the polls since their landslide election just last year.

If you have got a sizeable pension pot, which you are not planning to add to you may want to consider drawing some income down and giving it away. Gifts out of excess income are free of Inheritance Tax and avoids the need to survive 7 years for exemption. However, the gifts must be regular in nature, so perhaps set up a standing order to pay the income you can afford to your loved ones and prevent your pension from getting much larger.

If you are not in a position where you can afford to give much away, or you have no spare income for the time being then sit tight and see what happens. It is important to note that drawing down your pensions have very important income tax consequences and some irreversible effects. Therefore, do not rush to do anything drastic, instead, seek the advice of a good Independent Financial Advisor.

For further information and advice, contact our team today.