Inheritance tax on pension funds (2024)

Sarahspangles Posts: 1,636 Forumite

Today at 10:11AM

Times, Telegraph and Mail all seem to be winding up their readership, going by the number of posts on this board where people are concerned that changes will be made in this tax year or with retrospective effect. Which is unlikely.

I’m sorry to hear you’re unwell and hardly need this worry. If you’re up to posting your current position and plan maybe some of the clever people on this board will help you work out if this is the best option for you and your wife.

Today at 10:36AM

There have been no plans given from any authoritative source stating that pensions will suddenly be subject to IHT in the forthcoming budget. You are reading the papers that are prepared to lie to propagate their political line. It seems very unlikely considering the wider effects of implementing such a change.

In any case bequests to spouses are not currently subject to IHT at all under current rules.

Keep_pedalling Posts: 17,637 Forumite

Today at 11:17AM edited Today at 11:18AM

Pat38493 Posts: 2,834 Forumite

Today at 11:31AM edited Today at 11:34AM

Keep_pedalling said:

The money would be IHT free to her regardless of where it is held because spousal exemption applies to anything left to a spouse.

Sorry to hear about your situation OP.

I might be remembering this wrong but I think there are 2 aspects here (please correct me if I'm wrong somebody)

Inheritance tax - today pensions are not part of a person's estate when they die. As stated above, even if this was changed (very unlikely due to all the complications it would cause in all sorts of legal areas), most likely, the money would still be exempt from inheritance tax if the couple are married as there is a spousal exemption.

Income tax - today a pension which is passed to a spouse after death prior to age 75 is not subject to any income tax at all and the spouse (or whoever else the pension is left to) can inherit that money without any tax payable. If this was changed, it could mean that the spouse would inherit the pension as a normal pension i.e. she would need to pay income tax at her marginal rate whenever she decides to draw the benefits. Note that even if this happens, the tax would only become payable by the spouse when she decides to draw on some or all of the money out of the pension.

This does not necessarily even mean the money would be taxed - it would depend how much money she took out during each year, and what other sources of income she has (e.g. state pension).

Taking the tax free cash now wouldn't make any difference because the spouse would still be able to draw tax free cash under the same rules as you when she draws the pension.

Keep in mind that all of this is speculation and you could end up taking actions which are not needed.

OP - you should also make sure your nomination forms are up to date to leave that pension to your wife - "inheritance" of pensions is done via nomination forms to the pension provider, and not via your will.

Albermarle Posts: 23,705 Forumite

Today at 11:43AM

There are two separate issues.

Currently money in a pension pot is outside your estate, so is not included in any IHT calculations.

A pension pot left to a beneficiary can currently be withdrawn 100% tax free, if the donor dies before age 75, but not afterwards.

Both issues have been identified well before this Govt was installed, as the tax treatment being rather too generous and something to be looked at in the future. It is known for example that people deliberately avoid taking income from a pension if possible so as to avoid IHT.

This has resulted in increasingly fevered speculation that something will happen in the next budget. However the most likely outcome will be some kind of 'pensions review' being started. Pensions legislation is always complicated and can not be implemented that quickly, even if there was a desire to look into the above issues.

As stated above the IHT issue would not apply to you anyway as it would be a spousal exemption.

dunstonh Posts: 117,484 Forumite

Today at 11:54AM edited Today at 11:55AM

i have approx £250,000 in a pension fund that I have not touched and have done so in order to preserve it for my wife to inherit.
This is I have been told would be tax free to her.

Under current rules, if you die before 75 then it would be free of tax. If you die from age 75, she would still receive the pension free of tax but would pay income tax on withdrawals at the appropriate tax rate.

Now I have been reading that they plan to tax this as inheritance in next budget.

That is pure speculation and nothing has been said by Labour to suggest that. However, the treasury has considered the option of abolishing the age 75 rule. Nobody knows if Labour will go with that or not.

If they do now include this as inheritance would it thus be exempt if left to my wife as the house will be and any other monies , effects?

The media are widely speculating as they do every time a budget or autumn statement comes closer. With most of them, they get more wrong than they do right. So, asking us to speculate on media speculation is pointless.

There are massive problems bringing pensions into the estate. How do you deal with trust based schemes, contract based schemes and DB pensions. What about pension term assurance? What about pensions that have no value until they are commenced? What about post age 75 inherited DC pensions that pay income tax when drawn (double taxation).

It is highly unlikely that pensions would be brought under inheritance tax. The most credible option is either the abolition of the age 75 rule (so pensions would be taxed under income tax when drawn and requires very little cost of implementation by providers or HMRC - it could also lead to higher tax than inheritance tax due to highest tax rates) or a new tax on pensions.

Or they wait until the pension review is carried out which is when changes are normally consulted on and decided.

Maybe I need to take 25% tax free now so only the remaining 75% will be taxed on my death.

That would be a strange thing to do as you would be bringing money that is currently outside of the estate and tax-free into your estate and making it taxable on second death. IHT is 40%. If the age 75 rule is abolished, then income tax is 20% at basic rate.

I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.

Tax_Slave Posts: 175 Forumite

Today at 1:05PM

Thanks everyone for the detailed and considered replies.
In summary it’s wait and see what comes from the budget, also it looks unlikely that pensions will be part of inheritance tax and even if they are then spousal exemption will apply.

I know the government are desperate for more tax take, so I think something will happen with pensions and it will be the option that can be hidden in the background triggering least press response, unlike the winter fuel payments.

Thanks again for the replies.
I’m trying to make things as easy as possible to leave money for my wife to live on.