Martin Lewis has spoken about a “massive” new tax coming in on pensions. People may want to look over their finances now as the new rules will take effect from next year.
A recent episode of Mr Lewis’ BBC podcast had a focus on inheritance tax. He was joined by industry experts to discuss the tax, which is normally levied at 40 percent. They discussed various elements of the tax, including the tax-free allowances that apply, the rules around gifting and some key changes coming up as the tax is being expanded.
In the Autumn Budget 2024, Chancellor Rachel Reeves announced plans for the remit of the tax to be expanded to include pensions, from April 2027. Mr Lewis said: “This is a massive change coming. In many ways, because pensions weren’t in the inheritance tax regime, many people were operating that they would leave their money in their pensions, because it was a good way of passing assets inheritance tax-free.”
Lucie Spencer, financial planning partner at wealth management group Evelyn Partners, told Mr Lewis how the looming change is affecting the guidance she gives to her clients. She said: “For years, I’ve been working with clients that were spending down their ISA allowances, were spending down their general investment accounts. Now we’re revisiting that planning, especially for those over 75 because of that double taxation rule.”
The new rules will apply to unused defined contribution schemes. In cases where the person who dies is aged 75 or over, the successor will also have to pay income tax on any amount they receive from the pension.
Ms Spencer also spoke on how the changes are influencing people’s behaviour. She said: “We are seeing a lot of clients now drawing more income to gift away, to make gifts out of regular income.”
You can give away any amount out of your regular income inheritance tax-free, as long as they are from surplus income so your standard of living is not affected.
More details still needed
With the new tax on pensions just over a year away from coming into force, experts are warning there are several issues around how the tax will work that still need to be set out. Hannah Martin, pensions expert and founder of Rich Retiree, said it still needs to be made clear who exactly will have to report and pay the tax, what happens if there is more than one pension, and how the allowances can be divided between pension and non-pension assets.
She pointed to another question around timings. Ms Martin said: “In the UK, inheritance tax must usually be paid by the end of the sixth month after the person dies in order to avoid interest charges.
“However, this puts pressure on executors to ascertain the value of the pension quickly. And what happens if they can’t access the pension money to pay the tax?”
She said there could also be “complications” around valuing pensions and benefits such as lump-sum death benefits from a defined benefit pension, guaranteed annuity payments, drawdown funds already in payment and joint-life annuities.