Pensions and Inheritance Tax: Important Changes and Their Implications

The tax regulations on pensions and inheritances are undergoing significant changes that will greatly impact future tax planning. While pensions could previously increase in value tax-free, they will now be taxed at a rate of 40% unless transferred to a spouse. This necessitates more skillful tax planning for many individuals. The effects of these changes are particularly severe because tax exemptions have not been adjusted for inflation, which brings more estates into the inheritance tax bracket. The frozen thresholds will be maintained until 2030 and, according to analyses, could cost families up to £234,000 in hidden taxes. Calculations by Quilter show that, for example, on an estate of £3 million, the inheritance tax will increase from £600,000 to £1.07 million. For couples with a transferable allowance, the tax burden also rises substantially. Experts warn of a "bureaucratic nightmare" in managing these changes. Advisors recommend using pension funds as a last source of income in retirement. It might be prudent to give away parts of the pension now to avoid additional tax burdens. Alternatively, savers could consider withdrawing funds from the pension and investing them in tax-free accounts like ISAs. The National Farmers Union expresses concerns that the changes are particularly devastating for smaller agricultural businesses and their successors. Additionally, there is worry that the removal of tax reliefs for business heirs could hinder growth. For many people, there is an urgent need to review their existing wills and tax planning to be prepared for the upcoming changes. It is advisable to seek expert advice to avoid unnecessary financial burdens.