Steady as she goes for pensions – but savers still have work to do

Pensioners, pension savers and the pensions industry will all be relieved that the Chancellor has announced no significant pension changes this budget. However, the changes already under way still give them plenty to work through.

The most significant is that, for deaths on or after April 2027, most unused pension funds (money purchase schemes and lump sums in defined benefit (DB) schemes) death benefits will fall within the scope of inheritance tax (IHT). This effectively creates a whole new strand of tax that has the potential to affect anyone with pension savings in the UK. And it will change pension saving forever for high-net-worth individuals, many of whom are already working with their lawyers and financial planners on estate and pension planning.

HMRC’s next Technical Note on how the new rules will operate is expected to be issued before the end of the year. It’s due to set out further important details for both UK-based high-net-worth individuals but also for overseas residents whose only remaining UK assets may be their pension savings.

It should also explain how the spouse exemption will work for a non UK-resident spouse under the new regime, and give full details on how the regime is to apply to pension qualifying recognised overseas pension schemes (QROPS).

In the meantime, the top tip for high-net-worth pension savers who are still in employment is to use their employer’s salary sacrifice scheme – sometimes called salary exchange – when making pension contributions, to the maximum extent they can.

This is because last year’s Budget announced that, from 6 April 2029, only the first £2,000 a year of employee pension contributions made through salary sacrifice will be free of employee and employer national insurance contributions. Anything sacrificed above that won’t benefit from any national insurance contribution savings for employers or employees.

In the meantime, individuals should plan ahead, by:

• Tracking down and making a note of all pension funds to sit alongside a schedule of other assets and liabilities (using tools such as the Find pension contact details service on gov.uk).
• Review IHT exposure and related liquidity issues: taking pension savings into account and considering how that IHT will be paid in practice.
• Lifetime planning: consider what lifetime steps may be taken to reduce increased IHT exposure, whether that’s through spending and enjoying pension funds in retirement or drawing on them to facilitate a well-thought-out strategy of lifetime gifting (possibly making use of the exemption for a pattern of regular gifts made from surplus income). Seeking joined up legal, tax and financial planning advice is key.
• Revisit will planning and pension expression of wishes: simple changes can have a big impact. 
  • Wills can often be written more tax-efficiently.
  • Pension expression of wishes which favour children over the surviving spouse may be tax-advantageous while pensions are outside the scope of IHT. But from 6 April 2027 they risk an accelerated IHT bill.
  • In contrast, nominating a surviving spouse or civil partner to inherit pensions in the first instance will at least defer IHT on pensions until after the death of the survivor.
  • Remember, however, that the surviving spouse who inherits pensions on the death of their partner will then get to decide the onward destination of those funds, so this solution may not be appropriate. There are other options that can be considered (for example, where the first deceased spouse has children from a previous relationship who are the ultimate intended beneficiaries).
• Choice of executors: lay executors are more likely to need professional help to navigate the estate administration process. Professionals will want to have a full picture of estate assets, overall wishes, and the family situation before agreeing to be appointed.
• A life insurance policy written in trust may be a solution if the cost is not prohibitive. This will depend on an individual’s circumstances.
• Commercial premises: those who own a commercial property via their pension need urgent specialist advice about their options to avoid a significant IHT liability impacting on a business-critical asset (whether via appropriate life insurance arrangements where feasible or more wholesale restructuring).

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On 28 October, our experts will be providing instant reaction to the key Budget measures on our dedicated hub and our LinkedIn page. And in the following weeks, we’ll have in-depth analysis and advice on how the Chancellor’s measures will affect your business.