Savers look to annuities and gifting as IHT reaches pensions
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A fifth of UK savers say they are considering an annuity to limit inheritance tax implications, and close to a third say they will gift more regularly, a new survey suggests, after the government said it will make unused defined contribution pots part of a deceased’s estate from April 2027.
The survey was conducted among a nationally representative sample of 516 consumers on 5 November for provider Standard Life. It found 21% now thinking about taking out an annuity in retirement, and 31% are thinking about making financial gifts to family more regularly to avoid an IHT charge on their pension. Gifts must be made seven years or more before death to avoid the 40% IHT charge entirely.
The tax change means three in 10 savers surveyed feel they will not be able to pass on as much to loved ones as previously.
Standard Life’s retirement savings director Mike Ambery said the pension and inheritance tax changes in the Budget have highlighted to people the need to make sure they are using their pension assets effectively throughout retirement.
As potentially more savers expect to be caught by IHT, annuities could become more attractive again – with funds used to provide a pension rather than for intergenerational wealth transfer, which was the government’s stated aim in making the change.
“There is an increased likelihood that people will want to spend their pension as retirement income to remain below the IHT threshold,” Ambery said.
Since there is no requirement to use the full pension pot when buying an annuity, retirees could buy a guaranteed income to live on while lessening any IHT bill, leaving the rest of their pension pot invested and benefitting from various tax reliefs, he explained.
However, “the announcements made in the Budget will affect people’s finances in different ways”, he stressed, so people should “shop around and make the most of advice and guidance”.
The IHT change is expected to affect mainly the wealthiest savers, whose assets outlive them and who have typically been advised to use up other wealth before touching their pension pots for living expenses.
Gary Smith, a financial planning partner and retirement specialist at wealth management firm Evelyn Partners, said the IHT rule change will transform the way some savers think about their pensions and funding retirement, and means pensions will regain their purpose as a tax efficient vehicle primarily used to fund retirement.
For those that had planned to use pensions as a tool to transfer money to loved ones, it means they have to go back to the drawing board.
"Many retirees, and especially those close to and above age 75, will be revising what to do with their pension pots and that will probably lead to more pension savings being drawn down," he predicted. "The prospect of pension funds being taxed twice, if beneficiaries also have to pay income tax on withdrawals, is one that most savers will want to avoid," he said.
The survey was conducted among a nationally representative sample of 516 consumers on 5 November for provider Standard Life. It found 21% now thinking about taking out an annuity in retirement, and 31% are thinking about making financial gifts to family more regularly to avoid an IHT charge on their pension. Gifts must be made seven years or more before death to avoid the 40% IHT charge entirely.
The tax change means three in 10 savers surveyed feel they will not be able to pass on as much to loved ones as previously.
Standard Life’s retirement savings director Mike Ambery said the pension and inheritance tax changes in the Budget have highlighted to people the need to make sure they are using their pension assets effectively throughout retirement.
As potentially more savers expect to be caught by IHT, annuities could become more attractive again – with funds used to provide a pension rather than for intergenerational wealth transfer, which was the government’s stated aim in making the change.
“There is an increased likelihood that people will want to spend their pension as retirement income to remain below the IHT threshold,” Ambery said.
Since there is no requirement to use the full pension pot when buying an annuity, retirees could buy a guaranteed income to live on while lessening any IHT bill, leaving the rest of their pension pot invested and benefitting from various tax reliefs, he explained.
However, “the announcements made in the Budget will affect people’s finances in different ways”, he stressed, so people should “shop around and make the most of advice and guidance”.
The IHT change is expected to affect mainly the wealthiest savers, whose assets outlive them and who have typically been advised to use up other wealth before touching their pension pots for living expenses.
Gary Smith, a financial planning partner and retirement specialist at wealth management firm Evelyn Partners, said the IHT rule change will transform the way some savers think about their pensions and funding retirement, and means pensions will regain their purpose as a tax efficient vehicle primarily used to fund retirement.
For those that had planned to use pensions as a tool to transfer money to loved ones, it means they have to go back to the drawing board.
"Many retirees, and especially those close to and above age 75, will be revising what to do with their pension pots and that will probably lead to more pension savings being drawn down," he predicted. "The prospect of pension funds being taxed twice, if beneficiaries also have to pay income tax on withdrawals, is one that most savers will want to avoid," he said.
Since income tax is not levied on pensions during the savings phase, those inheriting are required to pay income tax on pension capital they draw down, just as retirees do on their own pension.
There is also the fact the residence nil rate band starts to disappear if the value of an estate exceeds £2m, he pointed out.
"But even if you don’t necessarily want to be sitting on a big pension pot when you die, if you start extracting money from it rapidly, then that could throw up its own tax penalties," he warned.
This article has been added to with more comment since original publication.
There is also the fact the residence nil rate band starts to disappear if the value of an estate exceeds £2m, he pointed out.
"But even if you don’t necessarily want to be sitting on a big pension pot when you die, if you start extracting money from it rapidly, then that could throw up its own tax penalties," he warned.
This article has been added to with more comment since original publication.
