More retirees are looking at withdrawing pension pots earlier, to avoid their savings going to the taxman in the future.
Financial planners, wealth managers and lawyers are among those reporting an increase in wealthy older people withdrawing sums from their pensions to splash out on family holidays or gift to their children.
And experts say this has been triggered by Rachel Reeves’ decision to pull unspent pension money into the inheritance tax (IHT) net from April 2027, a shake-up announced in the Autumn Budget.
When this change is introduced in two years’ time, large numbers of people will be landed with bigger IHT bills when their family members pass away.
Steven Appleton, partner and head of private client at Brabners Personal, said that there once was a massive disincentive to spend the money from pensions because of the IHT treatment on death, but the changes from April 2027 have “completely upended” this.
Mr Appleton, a lawyer who specialises in estate planning, said: “That means we’ll see people spending more while living and looking to enjoy the fruits of their hard savings.
“I’ve always encouraged my clients to consider themselves first and foremost and enjoy life – whether that’s going on holiday or pursuing a passion they’ve always had but I’m stressing this even more heavily now.”
“And clients aren’t just looking to enjoy themselves but still looking for ways to treat their loved ones. That might mean purchasing a holiday home and maximising family time or taking three generations of a family abroad for a once in a lifetime trip.”
Pensioners can withdraw 25 per cent of their pension pot tax-free, up to a total of £268,275.
Tom Selby, director of public policy at AJ Bell, said the investment platform was also hearing from its advisers that rising numbers of clients were considering accessing their pensions sooner than planned in an effort to avoid IHT.
Ian Cook, chartered financial planner at Quilter, said: “I am increasingly having conversations with clients about enjoying the money they’ve worked hard to save. With it likely that the IHT treatment of pensions could be scaled back, some people are rethinking their approach.
“Rather than saving every penny for the next generation, it’s a moment to consider whether spending a little more on themselves – holidays, home upgrades, or experiences – might now make more sense.”
Matt Conradi, deputy CEO and head of client advisory at Netwealth, said: “When advising clients, pension assets are now likely to be pro-actively considered as part of spending or gifting plans in a way that they were not previously.”
Currently, defined contribution (DC) pensions, where you build up a pot of money to give you an income when you retire, would not normally be part of your estate and there would be no IHT to pay.
The estate simply means all the assets like a house, investments or valuables, that someone owns when they die.
But from 6 April 2027, DC pensions are set to be subject to IHT, with a consultation set to confirm this. The standard rate of IHT is 40 per cent.
Where the person who dies is over age 75, the money will also be subject to income tax, meaning a higher-rate taxpayer beneficiary could effectively face a tax charge of 64 per cent on money left to them.
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square SAVINGS Money ClinicRead MoreWho will be affected by the change?
Even with this change, IHT isn’t going to be an issue for most people as everyone has an entitlement to a nil-rate band of £325,000 of assets which they can leave to anyone free of IHT. This is also known as the IHT threshold.
There is an additional £175,000 nil-rate band that applied to your main residence if passed on to a direct descendant and your estate is below £2m.
An estimated 10,500 estates will pay what is known as Britain’s ‘most hated’ tax in 2027/28 for the first time, as a result of the changes, according to government figures.
Although the Government has said it intends to bring unspent pension pots into the IHT net from April 2027, we don’t have the final rules yet and there has been significant pushback from across the industry, Mr Selby said.
Therefore, it is important not to make any rushed decisions about your retirement pot ahead of this deadline, as up until April 2027, it will still be possible to pass your pension to your nominated beneficiaries without paying IHT.
He added: “In fact, if you are unfortunate enough to die before age 75, your pension could be inherited completely tax-free.
“IHT should only be a factor for those planning to pass money onto someone who isn’t their spouse or civil partner, as transfers to either will remain IHT free – including when pensions are brought into IHT from 2027.
“In addition, where someone is planning to pass money onto other nominated beneficiaries, an IHT charge of 40 per cent will only become an issue once your nil-rate bands have been exhausted.”
Consider gifting
Gifting money or spending it are two of the simplest and most effective ways to reduce the value of your estate, leading to a lower tax bill for your offspring, Craig Rickman, pensions expert at interactive investor, said.
A recent interactive investor survey revealed that 21 per cent of respondents plan to withdraw more from their pension than originally intended and spend it, while 19 per cent plan to increase withdrawals and pass the money on.
You can first access your pension cash at age 55. But this is increasing to 57 from April 2028.
Mr Rickman said: “Provided you don’t need the money, hooking out any remaining tax-free cash is an obvious first port of call as there’s no income tax to pay on the withdrawal.
“And if you decide to give it away, as long as it’s either covered by one of the IHT gifting exemptions or you survive seven years, there’s no IHT to pay either – so it’s extremely tax efficient.”
The key is not to splurge too heavily or gift anything that jeopardises your financial security down the line and be mindful that withdrawals beyond your 25 per cent tax-free entitlement will be added to your income tax bill, he said.
If you are taking out money to gift, it is worth speaking to a financial advisor, and being aware that if you pass away within seven years, some IHT may still be owed.
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