The UK Government’s recent Budget has introduced significant changes to the inheritance tax (IHT) treatment of private pensions, set to take effect from 6 April 2027. For doctors who have incorporated private pensions into their estate planning strategies, it’s crucial to understand these changes and consider revisiting your plans to ensure they remain effective.
Key changes to inheritance tax on private pensions
Currently, private pensions are typically excluded from a person’s taxable estate for IHT purposes, allowing them to be passed to beneficiaries without incurring IHT. However, starting from 6 April 2027, most unused pension funds and death benefits will be included within the value of a person’s estate for IHT purposes. This means that the value of your private pension could be subject to the standard IHT rate of 40% on amounts exceeding the existing thresholds.
Impact on NHS Pensions
It’s important to note that NHS pensions are not affected by this change. They will continue to be treated as they currently are for IHT purposes, remaining outside the taxable estate. This distinction is crucial for doctors who have both NHS and private pensions, as it affects how each component of your retirement savings is treated under the new rules.
Current IHT thresholds and rates
As of now, the IHT thresholds and rates are:
- Nil-Rate Band (NRB): £325,000 per individual.
- Residence Nil-Rate Band (RNRB): An additional £175,000 per individual, applicable when passing a primary residence to direct descendants.
- IHT Rate: 40% on the value of the estate exceeding the combined NRB and RNRB thresholds.
These thresholds have been frozen until at least 2028, meaning they will not increase with inflation, potentially bringing more estates into the scope of IHT over time.
Recommendations for doctors using private pensions in estate planning
Given these forthcoming changes, it’s advisable to review your estate planning strategies well before the new rules come into effect. Consider the following steps:
- Assess your current estate plan: Evaluate how the inclusion of private pensions in your taxable estate from April 2027 will impact your overall IHT liability.
- Explore alternative strategies: With private pensions becoming subject to IHT, other methods to mitigate tax exposure include:
- Lifetime gifting: Making substantial gifts to beneficiaries at least seven years before your death can reduce the size of your taxable estate. Taking a pension commencement lump sum from your private pension, tax free, and gifting it could be an efficient way to reduce the value of the fund that is subject to Inheritance Tax.
- Utilise exemptions: Regular gifts from surplus income can be exempt from IHT if they meet certain criteria. This can include contributions made to pensions for children, or grandchildren, reducing the taxable value of the estate, attracting relief on the contribution and thereafter growing in a virtually tax-free environment.
- Establish trusts: Placing assets into trusts can help manage and protect wealth for future generations, potentially offering IHT advantages.
- Life insurance policies: Consider policies written in trust to cover potential IHT liabilities, ensuring beneficiaries receive their intended inheritance without the need to liquidate assets. Taking an income from your private pension, flexibly or by way of an annuity can provide the means of funding a whole of life policy, written under trust, to meet some or all of the IHT bill expected. If the ‘income’ is not needed premiums should meet the surplus income exemption.
- Consult a financial adviser: Engage with a professional experienced in medical professionals’ estate planning to tailor strategies to your specific circumstances and ensure compliance with evolving tax laws.
By proactively addressing these changes, you can better protect your assets and provide for your beneficiaries in a tax-efficient manner.
The content of this article is for general informational purposes only and does not constitute financial, legal, or tax advice. Inheritance tax (IHT) planning and the use of trusts are not regulated by the Financial Conduct Authority (FCA). Tax treatment is based on current legislation and may be subject to change.
Content correct at time of writing.