What do Rachel Reeves’ pension Inheritance Tax changes mean for you?

Category: News

You no doubt read your Autumn Budget update back in October.

After a resounding election victory and months of speculation, Labour delivered their first Budget in over a decade. The prime minister and the chancellor, Rachel Reeves, had promised to make the tough choices, and speculation was rife in the run-up to the first-ever Budget delivered by a female chancellor.

And while many rumoured measures failed to materialise, changes to the Inheritance Tax (IHT) treatment for pensions were announced. The changes, set for 2027, will bring pensions into the net for IHT calculation purposes.

The weeks before the Budget saw panicked asset disposals and tax-free cash withdrawals as savers and investors tried to pre-empt the chancellor’s speech – a dangerous game. Likewise, it will be important over the next few years not to panic about the potential effects of the announced pension changes on your estate and IHT planning.

At Globe IFA, we’re on hand to digest the impact of these changes on your behalf and to offer reassurance.

Keep reading for your look at the changes and why they don’t need to result in knee-jerk reactions or emotional decision-making.

The change is designed to raise the Treasury’s IHT receipt – already at record highs

Recent HMRC data confirms that less than 5% of UK deaths in 2021/22 resulted in an IHT liability. And yet IHT is often thought of as the UK’s “most hated tax” – a moniker that it’s unlikely to shake off in the coming years, with Treasury receipts set to continue rising.

Frozen thresholds have already seen more families caught in the IHT net over recent years. The chancellor’s decision to further extend the freeze on the nil-rate and residence nil-rate bands to 2030 will only exacerbate that trend.

IFA Magazine recently looked at the Treasury’s IHT take over the last few years:

  • £6.1 billion in 2021/22
  • £7.1billion in 2022/23
  • £7.5 billion in 2023/24
  • £8 billion-plus in 2024/25 (projected).

If 2024/25 predictions prove accurate, IHT receipts will smash through the £8 billion barrier this tax year.

The chancellor will expect her changes to increase these figures from April 2027, when the measure is due to come into effect. But there’s no reason to panic just yet.

3 reasons why pension IHT changes aren’t cause for panic

1. The measures are still subject to consultation so things could change

The IHT treatment of pensions has historically been very favourable, making it somewhat inevitable that Rachel Reeves would set her sights here.

While the direction of travel is clear, it’s also worth remembering that the changes are still subject to consultation and are not due to come into force until 2027.

Not only does this mean that there’s plenty of time to mitigate the potential impact of these changes, but it also means that the measures themselves could change.

As with any area of your long-term financial plans, emotional or knee-jerk reactions are unlikely to bring favourable results. Instead, stay calm and remember that if your goals haven’t changed then it’s unlikely that your plans will need an overhaul either.

2. Your pension is already tax-efficient so make the most of it

If you can afford to retire without accessing all of your pension savings, the current rules allow for your retirement funds to form part of your estate planning.

But this isn’t what your pension is designed for. Pensions are intended to provide you with an income when you finish work and they are tax-efficient on the way in, thanks to generous tax relief, and also on the way out. Pension tax-free cash entitlement remained untouched in the Autumn Budget, despite rumours many pre-announcement rumours.

You might view future changes to IHT on pensions as an important opportunity to refocus your retirement planning. Your pension funds are designed to help you live your desired lifestyle after work, whether that’s world travel or spending more time with your family.

Untangling your pension fund from your legacy planning might leave you free to make memories, without feeling guilty about spending your own hard-earned pension fund.

3. Estate planning doesn’t begin or end with your pension

In her Budget announcement, Reeves referred to the current IHT pension rules as a “loophole”. And whatever your view on this choice of term, it remains true that estate planning is a complex area that is far from wholly reliant on pension funds.

At Globe IFA, we have decades of experience managing inheritance and estate planning. From trusts and tax-efficient gifting to your will and Lasting Power of Attorney, we can help you manage your legacy in the way that works best for you.

Get in touch

If you’d like help with your estate or legacy planning, please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The Financial Conduct Authority does not regulate estate planning, tax planning, Lasting Powers of Attorney, or will writing.