Why Inheriting A Pension Could Become Painfully Taxing
From 2027, inheriting a pension may drag funds into IHT and sometimes income tax. My blog post this week explains the rules, deadlines, and the RNRB trap. It outlines practical steps to mitigate exposure while keeping family wealth intact ... Inheriting a pension, A legacy of wealth, Retirement awaits For years, inheriting a pension was seen as a tidy way to cascade wealth without tripping the inheritance tax wire. That landscape is set to change. From April 2027, unused pension pots will start to count towards an estate for Inheritance Tax purposes, and families could find themselves navigating a very different set of outcomes. What's changing from April 2027?Under current rules, defined contribution funds can pass tax-free if death occurs before 75, or be taxed as income at the beneficiary's marginal rate if death occurs after 75. From 2027, the principle shifts: the value of most defined contribution pensions and lump sum death benefits from defined benefit schemes will be pulled into the IHT calculation. A transfer to a surviving spouse or civil partner will remain free of IHT at that stage, but when they later die, whatever remains in the inherited pot could face IHT in their estate.The mechanics really matter here. Pension scheme administrators will be responsible for settling any IHT due from the pension itself. They'll have two months to report and six months to pay after the date of death, with penalties and interest for lateness. Executors may also be caught by sanctions if processes slip. The net effect is that a previously straightforward asset can now introduce cash‑flow friction during a difficult time. Why this can mean double taxation!Where death occurs after age 75, beneficiaries already face income tax on withdrawals at their own rates. Add the new IHT inclusion, and a pot could suffer IHT on its value and then income tax when money is drawn. That is an uncomfortable combination, particularly for adult children who might already be higher‑rate taxpayers. In simple terms, inheriting a pension could become less efficient than many assumed, especially for those who delay engaging with their options. The stealth impact on the residence nil‑rate band means |
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If anything I've written in my blog post resonates with you and you'd like to discover more of my thoughts about inheriting a pension and how to minimise Inheritance Tax and in some cases Income Tax, then do feel free to call me on 07434 287603 and let's see how I can help you. |
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