The recent announcement regarding the treatment of pensions for Inheritance Tax purposes has significant implications for your financial planning. From April 2027 onwards, any unused pension pots and death benefits will form part of your estate, potentially exposing them to a hefty 40% IHT ...
Navigate these changes effectively and protect yourself from additional Inheritance Tax!
Under the current system, pensions are exempt from IHT, allowing you to pass your hard-earned savings to your beneficiaries free of an additional tax burden. However, the impending changes create a scenario where your heirs might face not only IHT on the pension pot, but also income tax once they begin withdrawals.
"This double taxation could drastically diminish the value of your legacy!"
For example, should a beneficiary inherit a £100,000 pension pot, they will first encounter a 40% IHT, leaving them with £60,000. If they subsequently withdraw this amount and fall into the higher income tax bracket, they could lose a further 45%, resulting in a mere £33,000 reaching their hands—an effective tax rate of an alarming 67%.
To navigate these new inheritance rules and mitigate double taxation risks on pensions, proactive steps are essential. Rethinking your retirement drawdown strategy is a critical first step. Consider drawing down on your pension funds earlier in retirement, thus reducing the overall value of your estate. By doing this, you can decrease the amount exposed to IHT while still enjoying your savings.
Another valuable strategy is gifting assets. You can gift up to £3,000 annually without incurring any IHT. By gifting more significant amounts strategically over time, you can help to lower your taxable estate, which could ultimately minimise your potential IHT bill for your beneficiaries.
Additionally, consider downsizing your property. Selling a larger home and investing the proceeds into lower-value assets or gifting them to family members can effectively lower the value of your estate. Alternatively, turning a lump sum into an annuity removes it from your estate, which can provide peace of mind regarding IHT implications. Joint annuities can also ensure that your surviving spouse continues to receive income without the complicating factor of Inheritance Tax.
Finally, a life insurance policy placed in trust can play a crucial role in addressing anticipated IHT liabilities. This approach can provide your beneficiaries with essential funds to cover tax bills, alleviating financial burdens during a difficult time!
The new inheritance rules present significant double taxation risks for pensions, making it more vital than ever to review your financial strategies. By taking the necessary actions now, you can help safeguard your family wealth and ensure that your loved ones are not burdened with substantial tax bills in the future.
Proactively managing your estate and utilising available strategies will ensure you navigate these changes effectively, protecting you from additional Inheritance Tax, leading to a more secure financial legacy.
Until next time ...
HELEN BEAUMONT
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more about the changes to inheritance tax, do give me a call on 01908 774323 and let's see how I can help you.
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
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