As we approach 2027, significant changes are on the horizon for pensions and inheritance tax (IHT). With pensions set to become part of your taxable estate, it’s crucial to plan ahead. Here are some strategic moves to consider:
Gift your tax free cash
- Take the tax-free lump sum from your pension fund and make a lifetime gift. After 7 years, the money will be outside the estate for IHT.
- This not only reduces the taxable estate but also allows you to witness the joy and benefits your gift brings to your loved ones.
- Consider a Trust if you want to retain control over who benefits from the money and when. This way, you don’t have to give your money to the beneficiary straightaway, and the funds can continue to grow. The 7-year clock starts as soon as the Trust is set up.
Start drawing your pension, and give it away
- Regular gifts are exempt from IHT as long as they are affordable.
- You can start to draw on your pension regularly, either the tax-free cash or taxable income, and give the money to your family. These gifts are likely exempt from IHT immediately under the “normal expenditure out of income” rules.
- This approach ensures that your generosity has an immediate impact without waiting for the 7-year rule.
- Outright cash gifts can be used for spending or saving, or you could make pension contributions for family members, which are eligible for tax relief. Junior ISAs are another great option for younger family members, helping them build a secure financial future.
Take out life assurance to pay IHT
- Life Assurance can cover the IHT liability on the pension fund, protecting the inheritance for your beneficiaries.
- For example, a death benefit of £400,000 would cost £12,000 per year for a healthy 70-year-old. This could cover the IHT liability on a £1 million pension pot.
- The premium is guaranteed to never increase, and the sum assured is guaranteed, so you know the return at outset. The example above, you know your family will receive £400,000 tax free, if you pay £12,000 per year in premiums.
- Your pension fund can be used to pay the premiums, either with an annuity purchase or income drawdown.
- The annuity route would reduce IHT immediately by converting capital to income.
Business relief investments
- Some investments qualify for Business Relief, making them exempt from IHT after two years.
- You could withdraw the maximum lump sum from a pension and invest in these qualifying assets, thereby shielding this portion of the pension fund from IHT.
- It’s important to note that these investments are considered high risk and may be subject to changes in tax rules in the future.
Comment
These strategies not only help manage the IHT liability but also allow you to see the positive impact of your wealth on your family’s lives. It’s about making thoughtful decisions that benefit both you and your loved ones.
Not all solutions are right for everyone, and Financial Advice is key to understanding how these ideas would work for you.
How can we help?
Nathan Richardson is an Investment Director & Chartered Financial Planner in our expert Investment Management team.
For further financial advice concerning your investments or finances, please get in touch with Nathan or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online form.
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