The Chancellor has announced on Wednesday during her Autumn Budget that defined contribution pension pots will be subject to inheritance tax liability at the death of the holder from April 2027.
Pensions have been one of the most tax-efficient investments available to savers, with tax relief on personal contributions, tax-free growth and pension funds remaining outside of your estate for IHT on death.
That means some retirees have prioritised using other savings and assets to fund retirement before their pensions.
More detail are to follow, but the Chancellor has removed the IHT-free status of defined contribution pensions from April 2027, which will mean that the proportion of estates subject to IHT will grow from the current 6%.
Retirees and savers have 18 months to review their long-term plans. As defined contribution pension funds could now be subject to up to 40% IHT on death, we will probably see greater withdrawals from pension pots.
Pension withdrawals are subject to income tax, so some savers in drawdown will have an eye on the frozen £50,270 threshold at which point their overall income from all sources will be taxed at 40%.
It’s arguable that this consolidates the two tiers of the UK pension system, as the change removes one of the few advantages that defined contribution pensions had over the gold-plated final salary schemes that now exist largely just in the public sector. DC pot holders could leave their savings to beneficiaries tax-efficiently, while the death benefits for members of public sector or defined benefit pension arrangements vary between schemes, but usually entail an income paid to dependents.
There seems to be a willingness in Whitehall to allow the gap between private and public sector pension arrangements to widen.
