A long-term plan to keep pensions IHT risks at bay

FAMILIES are scrambling for new ways to protect their wealth after chancellor Rachel Reeves announced plans to slap inheritance tax (IHT) on unused pension pots from April 2027. Until now, pensions were one of the most effective ways of passing money to the next generation free of IHT.

- By Harvey Jones

Beneficiaries might still have to pay income tax if the policyholder died after the age of 75, but that only fell due when they made withdrawals.

New rules announced in last year's Budget will destroy that option. From 2027, unused defined contribution pensions could be hit with IHT, if the total value of the estate exceeds the £325,000 nil-rate band.

If there is an income tax liability too, families could potentially hand over two thirds of the money to HMRC. Many now fear that Reeves will further tighten the IHT net in her upcoming Budget on November 26.

Options include setting a lifetime cap on tax-free gifts, or scrapping the rule that sees gifts fall out of the IHT tax net if the donor survives for seven years after making them.

Extending that to 10 years or abolishing it entirely would be another hammer blow to families.

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Many families are taking action today. Some are draining their pensions and handing cash to children and grandchildren.

Others are splashing out on themselves, arguing that they may as well enjoy the money before the taxman grabs it.

Equity release is another tool people use to shrink their taxable estate, by unlocking cash from their property and either gifting or spending it. Yet many shun equity release, thinking it poor value.