4 days ago
‘My wife and I have £700k pensions written in trust – can we dodge Labour's inheritance tax grab?'
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Dear Charlene,
My wife and I both have Sipps (self-invested personal pensions) with a combined value of around £700,000.
When they were set up over 20 years ago, the documents referred to how they are 'written in trust'. I understand that changes are because of inheritance tax rules from April 5 2027, but I'm now worried as our other assets already take us up to the inheritance tax allowances.
We've given the pension providers details of who our preferred beneficiaries are upon death. But if we die after the changes in 2027, will both of our Sipp funds be subject to inheritance tax at 40pc? Or does the 'written in trust' have any relevance to the tax payable? We don't have a financial adviser.
Many thanks,
– Don
Dear Don,
Thank you for writing in. Your question is very timely, as the Government has just provided an update and the draft rules for how pensions and inheritance tax will work.
At present, pensions are generally not included in the value of your estate when you die. For pensions written under trust (like your Sipps), the trustees and/or the scheme administrators have full discretion as to whom any death benefits are paid.
It's very rare that nominations are not followed, but this discretion is currently what helps to keep pensions outside of estates and out of the clutches of inheritance tax.
Unfortunately, the Government has confirmed its plans to include unused pensions in the value of an estate. As you've mentioned, the new rules would apply for deaths on or after April 6 2027.
This is despite receiving hundreds of responses highlighting problems with the proposals and alternative ways to raise the same amount of tax revenue from pensions on death in a more straightforward way.
Although your Sipps will continue to be trust-based pension schemes, and trustees should retain discretion over who can be paid death benefits, I'm afraid this will no longer exempt them from inheritance tax.
The Government did announce an important change to the proposals – the executors or personal representatives of an estate will now be responsible in the first place for handling the reporting and payment of any inheritance tax on unused pensions, not the pension provider.
This is consistent with non-pension assets, and could mean the tax can be settled from other accounts, but still undoubtedly adds to the burden on the bereaved.
What will be included?
The changes don't mean that all pensions suddenly get hit with 40pc tax. Whether any tax applies will depend on the value of your pension when you die, your other assets, and who you plan to leave them to.
There will still be exemptions for dependents' pensions provided by defined benefit schemes (like those enjoyed by the public sector), survivors' pensions paid under an annuity and eligible lump sums paid to charities from unused pensions, including Sipps.
Anything left to a surviving spouse or civil partner will also be exempt from inheritance tax, but this could mean potential tax is stored up until the date they pass away if they don't spend the funds in their lifetime.
If you both plan to leave your respective assets (including Sipps) to each other, there will usually be no inheritance tax to pay on the first death. When the survivor passes away, their estate will be able to use both of your standard nil-rate bands (£325,000 each), and potentially both of your residence nil-rates bands (up to £175,000 each).
This extra band is available to set against a residential property left to your direct descendants, but starts to be tapered away for estates worth more than £2m.
Inheritance tax will apply above allowances and reliefs, usually at a rate of 40pc. This could be taken from the pension assets, or from other cash or assets held in the estate. It will be for the personal representatives of the estate and the beneficiaries to decide who pays and from where.
What can I do if I'm concerned about inheritance tax?
You've told me you don't have a financial adviser, but estate planning and tax can get very complex. A good financial planner will be able to talk you through possible strategies for making the most of your pensions and other savings in your lifetime and plans for when you are gone. They can also help you avoid costly mistakes of getting it wrong.
It's likely that we will see more people spend more of their pensions on themselves in their lifetimes. But people often also ask me about giving money to others from their pensions. While you cannot directly gift your pension to another person, you can use withdrawals from it to fund gifts to loved ones.
If it doesn't leave you short of funding your own retirement plans (or any care you might require), taking regular extra income to fund gifts could be a way of reducing your taxable estate and bringing forward some of the legacy gifts you might have in mind.
After any tax-free cash allowance you have left, you'll pay income tax on the withdrawals and that might tip you into a higher income tax bracket.
I've outlined the rules that can apply to making gifts in a previous letter, and explained how to make pension contributions now to your intended beneficiaries.
The proposals will feel particularly unfair to older pensioners, who perhaps do not have as long left to reorganise their finances to minimise tax. It's unlikely they will be able to get insurance to help their loved ones meet the increased cost of any inheritance tax bill at a reasonable price either, although it might be an option for some people to consider.
I'm afraid this is unlikely to be the positive answer you were hoping for, but I do hope it can help give you clarity and perhaps some next steps towards any plans or changes you might be considering.
Best wishes,
– Charlene
Charlene Young is a pensions and savings expert at online investment platform AJ Bell. Her columns should not be taken as advice or as a personal recommendation, but as a starting point for readers to undertake their own further research.
