for inheritance tax <\/a>(IHT) purposes.<\/p>\nIn fact, if you die before age 75, it is possible for these unspent pensions to be inherited completely tax free, while if you die after age 75 your beneficiary will pay income tax on the funds when they come to access them. <\/p>\n
This extremely generous tax treatment on death has meant in many cases it has made sense for people wanting to pass money onto loved ones after death to spend their retirement pot last to minimise the IHT burden.<\/p>\n
All of that is set to change in just under two years\u2019 time, however. Under plans unveiled by Chancellor Rachel Reeves at last year\u2019s October Budget, unspent DC pensions will count towards your estate when determining whether IHT is due.<\/p>\n
It\u2019s important to keep a level head when considering IHT. While the tax is much-hated and often feared among Brits, most people\u2019s beneficiaries will not actually pay it \u2013 even when pensions are brought into scope. <\/p>\n
For anyone passing assets, pension or otherwise, to a spouse or civil partner, IHT will not be payable \u2013 and this will continue to be the case after April 2027.<\/p>\n
Where you are passing the money to a non-spouse or civil partner, an IHT tax charge of 40 per cent will only apply to your estate above your IHT allowance, known as the nil rate band. <\/p>\n
In 2025\/26, this is set at \u00a3325,000 per person, with an additional \u00a3175,000 available when someone is bequeathing their main residence to a direct descendant. In addition, you can inherit any unused nil-rate band your wife or civil partner didn\u2019t use.<\/p>\n
Things to consider before \u2018gifting\u2019 your retirement pot<\/p>\n
The first thing to note is that proposals to bring pensions into IHT are not, as yet, set in stone, and there has been significant pushback from the pensions industry, warning of the potential complexity, costs and delays the changes would create. <\/p>\n
Furthermore, if you were to die before April 2027, as you are under age 75 under the current rules it would be possible for your entire unspent pension pot to be inherited completely tax-free.<\/p>\n
If you want to start IHT planning even with this uncertainty, there are ways you can pass money onto loved ones which can reduce or potentially eliminate your estate\u2019s tax liability. The primary method is to take advantage of so-called \u2018gifting\u2019 rules. <\/p>\n
You can gift up to \u00a33,000 a year to beneficiaries during your lifetime without it being added to the value of your estate for IHT purposes. Gifts over this amount are usually subject to the \u2018seven-year rule\u2019, meaning if you live for seven years after gifting the asset, such as money from your pension pot, the gift will not be subject to IHT.<\/p>\n
If, however, you die within that period, there will be an IHT charge on any gifts made above your available nil rate band. If you die within three years your estate will pay the full 40 per cent. If you die between three and seven years of making the gift, your estate will be subject to IHT at a reduced rate.<\/p>\n
It is also possible to make regular payments to another person without these being subject to IHT. There\u2019s no limit to how much you can give tax free in this manner, as long as you can afford the payments after meeting your usual living costs and the gift comes from your regular monthly income. <\/p>\n
The rules around this, and IHT in general, are quite complicated and it\u2019s easy to make mistakes, so I\u2019d strongly recommend speaking to a regulated adviser before making any decisions.<\/p>\n","protected":false},"excerpt":{"rendered":"A reader wants to know their options when claiming their pension – and if their family will have…\n","protected":false},"author":2,"featured_media":228060,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3093],"tags":[51,474,617,2499,2250,16,15],"class_list":{"0":"post-228059","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-personal-finance","8":"tag-business","9":"tag-finance","10":"tag-pensions","11":"tag-personal-finance","12":"tag-retirement","13":"tag-uk","14":"tag-united-kingdom"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@uk\/114775438793571407","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/228059","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/comments?post=228059"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/228059\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media\/228060"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media?parent=228059"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/categories?post=228059"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/tags?post=228059"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}