Rachel Reeves is coming for your pensions but there is still something you can do (Image: Getty)
In her maiden Budget in October 2024, Reeves announced that most unused direct contribution pension funds and certain pension death benefits will count towards the value of an estate for inheritance tax purposes from April 6, 2027. People who die on or after that date could see their pensions become liable for IHT, while beneficiaries may also pay income tax on withdrawals if the policyholder dies aged 75 or over. Some families could end up handing over around two-thirds of the unused pot to HMRC, in a double death tax raid.
New chancellor John Healey looks set to press on with Reeves’s IHT pensions raid, but pensioners aren’t taking this lying down. Instead, they’re fighting back by taking money out of their pensions and giving it to children and grandchildren while they can. New figures show the number of over-75s making lump-sum pension withdrawals has jumped sharply, suggesting some are taking action ahead of the new rules.
Andrew Tricker, chartered financial planner at Lubbock Fine Wealth Management, said the move was prompting many over-75s to take evasive action. In the last year, 83,800 people aged 75 and over made lump-sum withdrawals from private pensions, up 27% from 65,900. “As the first pension pots get hit by IHT next year, we could see even more intensive efforts to pass on assets IHT-free,” he said.
Withdrawing money from a pension and giving it away can work, but it needs careful planning. A gift is generally outside your estate if you survive for seven years after making it. If you die sooner, it could still be subject to IHT, although the tax charge can be reduced on a sliding scale depending on how long you survive.
You can usually take up to 25% of your pension pot as a tax-free lump sum, subject to the £268,275 lump sum allowance.
This could help with something like a house deposit for children or grandchildren, but Tricker said people should plan carefully. “Money withdrawn from a pension is difficult to put back, and you run the risk of finding yourselves short of money later in retirement.”
There are also simpler ways to give money away. HMRC allows you to give away £3,000 each tax year under the annual gifting exemption, and any unused allowance can be carried forward for one tax year.
Couples can double down, effectively giving away £12,000 if they haven’t used last year’s allowance. Smaller annual gifts of up to £250 can be given to any number of people, provided they haven’t benefited from the £3,000 allowance.
You can also make regular gifts from income, provided they’re made from your normal income and don’t affect your ability to meet your usual living costs. Attitudes to inheritances are shifting, too. Research from advisers The Private Office found that eight in 10 over-45s believed parents or grandparents should help younger relatives during their lifetime, rather than leaving everything in a will.
Daniel Blandford, partner at The Private Office, said many were held back by anxiety about their own future security after giving money away. He said people should work out what they can afford before making the gift, keep records of what they gave, when they gave it and to whom, and check the potential tax consequences first.
Most importantly, don’t assume that moving money from a pension automatically makes it tax-free. “Any withdrawal above your available tax-free lump sum allowance can be subject to income tax,” Blandford warned.
He added: “With careful planning and advice, families can transfer wealth in a way that supports the next generation without compromising their own retirement.”
Another way to beat Reeves’s tax grab is to buy an annuity. Keep battling!
