For years, pensions have been regarded as one of the most effective tools for passing wealth to future generations, offering unique tax advantages unavailable with other assets.
Traditionally, pension funds have been protected from Inheritance Tax (IHT): if you died before age 75, beneficiaries could often receive your unspent pension savings tax-free, and even after age 75, funds were taxed at the recipient’s marginal Income Tax rate rather than at punitive IHT levels. This special treatment has made pensions a crucial part of long-term estate planning for those aiming to leave a legacy.
However, the landscape is set to change considerably following the 2024 Budget. The Chancellor announced a major shift: from 6 April 2027, any unused defined contribution pension funds and death benefits remaining at death will be included in your estate for IHT purposes.
This means your pension, which was previously outside the scope of IHT, could now be liable for a tax charge of up to 40% if your total estate exceeds the nil rate band. For many families, this reform fundamentally alters how pensions should be viewed within the wider context of inheritance and succession planning, and it introduces new challenges when aiming to maximise what can be passed on to loved ones.
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