Appearing on Morning Live Iona Bain explained previously excluded workplace pensions could be impacted
A BBC expert has warned people about a major change coming for UK pensions next year, which could tip people into big tax bills. From next April, most unused pension funds and death benefits will count towards the value of a person’s estate for Inheritance Tax purposes.
Unused defined contribution pension savings and certain death benefits will be added to your total estate value, risking a 40% IHT charge if thresholds are exceeded. Appearing on BBC Morning Live expert Iona Bain said: “Generally speaking, pensions have not been included in those inheritance tax calculations, but that is changing from next year, to be specific, from the 6th of April next year because that’s the next tax year. From that point, generally speaking, unused pension money will be taken into account when calculating inheritance tax.
“Now, to be clear, we’re not talking about your state pension. That is not covered under these changes, and that has its own separate inheritance rules. What we’re talking about here is any workplace pensions you have, specifically defined contribution pensions and private pensions that you’ve opened.”
From 2027, if your estate (your total wealth, including savings, investments, and property, minus outstanding debts) exceeds certain thresholds, your pension could face IHT. And, if you die aged 75 or over, your beneficiaries may also pay Income Tax on withdrawals.
Pension Bee said: “This change reflects the Treasury’s belief that pensions are supposed to be used for funding retirement, not tax-efficiently transferring wealth. It’s supposed to encourage savers to use their pension funds as retirement savings pots, as intended. Most people won’t be affected. But for larger estates, it could be challenging.”
Ms Bain explained how much people can inherit without paying tax: “Basically the amount of tax that your beneficiaries will pay, it’s all down to the size of your estate when you pass away. So, the standard inheritance tax allowance is £325,000. And that is how much your estate can be worth without you having to pay any inheritance tax and that’s also known as a nil rate band. Now, the part of your estate that’s above that threshold will be taxed at 40%.
“However, if you leave your home to your children or grandchildren, you might also get an extra allowance on top of that that’s worth £175,000. And that takes your total nil rate band up to £500,000. And again, any part of your estate above that level will be taxed at.”
She added that the change means more estates could tumble over levels, which means they pay tax. She explained: “Nothing new here. But what’s changing is that we could see more estates creep over those thresholds and have to start paying inheritance tax or higher rates of inheritance tax once pension pots are taken into consideration.
“And just to give you a sense of the sums. And we’re potentially talking collectively about quite a lot here because already we saw inheritance tax receipts reach a record £8.5 billion in the last tax year. So if you think about rising property prices, inflation, and now pension pots being taken into account. I think those sums are only going to go up further.
“It’s really important to put this into perspective. Most people are not going to have to pay any inheritance tax at all – and what I don’t want to see is people rushing out and making rash decisions about their pensions on the basis of a tax that they may not have to pay.”
