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The inclusion of pensions in inheritance tax starting from April 2027 will have a significant impact on the tax bills of wealthy UK pensioners, according to experts in the field. In the recent Budget announcement, chancellor Rachel Reeves revealed plans to close a “loophole” that previously exempted pension funds from inheritance tax, allowing them to be used as a means of passing on wealth between generations.
The government estimates that this change will generate around £1.46 billion annually by April 2030, resulting in approximately 10,500 more estates being subject to inheritance tax compared to previous projections.
Furthermore, beneficiaries may also face income tax liabilities on pension proceeds even after inheritance tax deductions, particularly if the deceased pensioner passed away after the age of 75.
Tom Selby, public policy director at AJ Bell, highlighted that the new inclusion of pensions in inheritance tax calculations will lead to a substantial increase in tax burdens for certain affluent individuals.
Rachel McEleney, tax director at Deloitte, pointed out that the removal of the inheritance tax exemption could result in a double taxation scenario on death benefits, especially for cases where individuals die after the age of 75 and do not qualify for income tax exemptions.
With the abolition of the lifetime allowance in 2023, concerns around the use of pensions for retirement planning grew among government officials. While inherited pensions are currently tax-free for most schemes if the deceased passed away before their 75th birthday, the new changes will impact how pensions are viewed as a financial planning tool.
The Institute for Fiscal Studies noted that the current tax treatment of pensions as inheritance assets contrasts with their treatment as retirement income sources, creating a discrepancy in the tax system.
As a result of the reforms in 2015 that expanded options for managing pension pots, more individuals were expected to take advantage of the inheritance tax exemption in the coming years.
Although pensions will remain exempt from inheritance tax when passed to a spouse or civil partner, the broader changes will prompt a reevaluation of retirement income strategies for wealthier individuals.
Experts predict that retirees may begin drawing down their pension savings earlier to mitigate potential tax implications for beneficiaries, particularly in cases where both inheritance and income tax would apply.
Concerns have also been raised about the potential impact on elderly care and overall financial security for pensioners, as the changes could lead to reduced savings for later years.
Overall, the shift in inheritance tax rules for pensions is expected to reshape retirement planning strategies and prompt individuals to reassess their financial decisions in light of the new regulations.