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This will be unpopular, but isn’t this neutral with money not held in a pension? You didn’t pay income tax on the money held in the pension, so it’s taxed on the way out. Suppose you earn 100 and put it in a pension, your heirs pay 40% inheritance tax and income tax on the 60 left at their marginal rate up to 45%, leaving 33. Now suppose you didn’t put the 100 in the pension. You’d pay 45% income tax and then your estate would pay 40% inheritance tax on the remaining 60, leaving 33. There’s a separate question about whether you think tax rates are too high, but I don’t understand why pensions should be vehicles for leaving generational wealth? They’re intended to fund your retirement, not your children’s. It shouldn’t matter whether your children inherit 100 held in a pension, or an ISA, or in a property, it should all be taxed the same.
@Ash_Trader I completely agree with all you’ve said, but I think the frustration comes from those who now suffer because the goalposts have moved due to this rule change (I’m not one of those people, but I do empathise with their situation).
It used to be that pensions WERE a vehicle for IHT mitigation. For this reason, many people intentionally left their crystallised pension untouched and drew first from their GIA and their ISA, intentionally preserving their pension.
That’s now changed, and people that long since retired and had diligently structured their retirement income, have had rug pulled from under them and their planning flipped on it’s head.
For example, many people in retirement draw income within the basic rate band. This means they could have been taking from their pension, chipping away over time, year by year, at the basic rate of 20%. Instead, the rules have changed and their children could end up paying a much higher rate of tax.
Rules can often change - but as far as changes go this one has had a significant impact on what sensible financial planning looks like.
People tried making sensible, responsible financial choices, only for what that means to be radically changed
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From 6 April 2027, most unused pension funds and pension death benefits will be included in a person’s estate for inheritance tax (IHT) purposes.
The practical difficulties
Executors may need to trace forgotten workplace pensions, contact providers from jobs held decades ago, obtain valuations and calculate the tax due.
Missing paperwork and administrative delays could complicate the process.
IHT is generally due six months after the end of the month of death, with interest potentially accruing on late payments. Families could therefore face extra costs while dealing with bereavement and trying to access funds.
New rules will allow pension schemes to withhold up to 50% of the pension for up to 15 months to help pay IHT directly.
For those of us who aren’t from wealth and want to help their children, I think this is something we should campaign to change. The real rich will use trusts to get round this, but the people who worked hard will have 66% taxed rather than given to their children.