A pensions and inheritance tax update from our MD

In the 2024 Autumn Budget on 30 October, Chancellor Rachel Reeves announced an intention to bring ‘unused’ pension pots back into the scope of Inheritance Tax (IHT) legislation with effect from 6 April 2027. This was designed to realign personal pension and SIPPs, in particular, back to their primary purpose of providing for retirement income, rather than being used as multi-generational estate planning tools.

On the same day, HMRC launched a technical consultation on the changes to processes and procedures required to implement this change. The initial consultation closed on 22 January, and there were many representations made by individuals, pension scheme administrators and other finance and legal professionals. As a SIPP operator, 7IM provided input to the consultation. To date, there has been nothing made public as to the results of the consultations; the government has recently noted that this will be done “later this year”, when it publishes the draft legislation.

Whilst it is not expected that there will be a major change in direction in the government’s policy overall, it is understood that the consultation did result in significant concerns being raised as to the practical application of the legislation, particularly on the administration side, which could lead to additional complexities when dealing with estates of deceased pension investors. The result being possible delays in the payout of pension & SIPP benefits and, potentially, settlement of any IHT liabilities. On the latter, some (including the Association of Consulting Actuaries¹) took the view that there would need to be an extension to the six-month timeframe for payment of IHT before interest started to accrue or, as an alternative, the IHT regime specific to pensions should be considered separately.

7IM’s Private Client Team will continue to monitor developments in this space, as we are aware that many of our clients will be impacted by these proposed changes. As and when more detail becomes available, we will update our clients accordingly. In the meantime, we understand that many individuals and families will have questions on what they could or should be considering, particularly as we are still two years away from implementation.

We have already seen an increase in discussions around annuities and similar pension benefit options, for example, as clients start to reassess how best to deal with their accrued pension funds. Where previously the plan may have been to utilise pension funds later on in retirement (or perhaps not use them at all), we see the likelihood that they will be a core part of a retirement income and capital strategy. This brings up the need to tax-optimise these withdrawals alongside other assets, and perhaps consider a different approach along with other ISA, cash, investment, or property assets. Holding more of these assets with a single advice firm, or via a single platform will also be of interest, to aid the overall co-ordination of a retirement income strategy.

For other clients and pension investors, we are holding more discussions about the likely increase to potential IHT bills. For some, this will be the first time that IHT has featured on their radar. Should they be gifting more, spending more, or simply insuring against the IHT liability? There is no ‘one size fits all’ approach, and the need to take professional advice is ever-present.

Please reach out to your Private Client Director for more details and to discuss how this may affect your financial objectives, or message us directly: talktous@7im.co.uk

As always, this message should not be taken as investment advice, and must be considered as part of an overall investment and risk approach. Tax rules are subject to change and taxation will vary depending on individual circumstances.

¹ https://aca.org.uk/aca-responds-to-technical-actuarial-standards-for-pensions-consultation/