Brits have been warned that their children could be hit with a 67% tax on their unused pensions from next April. Claritas Tax, an advisory firm, has said that almost 40,000 people will be hit with higher inheritance tax bills. Those affected could see the average additional tax increase by £34,000, based on Government figures.
How the 67% figure is calculated
The 67% figure is based on the 40% inheritance tax charge applied to the pension's value, followed by income tax at 45% levied on the remainder.
Claritas Tax is urging those with substantial pension wealth to reassess their estate planning ahead of next April, as the traditional route of preserving pension funds and depleting other assets first may no longer be applicable.
Expert advice
Adam Keates, an associate partner at Claritas Tax, said: "There is no silver bullet for wealthy individuals with well-funded pensions." Drawing down pension funds would trigger an income tax charge, but Keates suggested this could still prove preferable. He added: "That could still be attractive compared with a potential combined tax exposure of up to 67% at death."
Claritas Tax recommended that affected individuals use pension withdrawals to fund regular gifts out of surplus income or channel the proceeds into tax-advantaged investment vehicles. The firm also said that moving abroad in retirement might change how your pension income is taxed, depending on the applicable double taxation treaty and personal circumstances.
Review before April 2027
Keates said: "Those with significant pension wealth should review their retirement and estate-planning strategy before April 2027. The long-established approach of preserving a pension and spending other assets first may no longer be appropriate for everyone."
Keates cautioned against drastic action, warning that individuals should not simply drain their pension pots. Any decisions should be made in consultation with financial and tax advisers. The tax expert noted: "Any decision must consider the immediate income tax cost, future retirement needs and what happens to the funds once they have been withdrawn. The aim should not be to withdraw money solely to avoid IHT, but to determine whether paying some income tax during their lifetime could produce a better overall outcome for them and their family as part of a wider strategy for succession and financial security."
