Some savers opted to take some – or all – of their pension 25% tax-free cash entitlement ahead of October’s budget, due to fears that pensions would be targeted. Savers in this position will need to review their options, now that these assets are no longer in a tax-free/investment environment. This article outlines some potential steps to consider:
Gifting to children
Cash taken from a pension will now form part of the estate for inheritance tax (IHT) purposes (until April 2027 pensions are outside of the estate). Gifting a portion of these funds to children is a viable way of passing money on to the next generation, while mitigating an IHT liability. If you survive for seven years, the gifted funds are typically exempt from IHT. Death after 3–7 years sees a reduced IHT charge apply on a sliding scale.
Contributing to ISAs
You could also opt to move money back into a tax-favourable environment, in the form of a stocks and shares or cash ISA. Adults can contribute £20,000 in each tax year, and any gains or interest are free from tax. You could also pay into your partner’s ISA if you use up your own £20,000 allowance. Remember, however, that ISAs do form part of your estate for IHT purposes.
Business Relief planning opportunity
Business Relief can be a really useful IHT planning tool for small business owners and investors, if taking your pension cash lump sum has exacerbated an IHT liability. Business Relief qualifying assets up to the value of £1,000,000 are exempt from IHT, after they have been held for two years. An effective tax rate of 20% will apply on qualifying assets above £1,000,000 from 6 April 2026. Unlike gifting this solution allows you to maintain control of/access to the funds.
Partners’ pensions
If you have accessed your pension benefits you will have triggered the ‘Money Purchase Annual Allowance’, which limits you to a maximum pension contribution of £10,000 in each tax year. However, you can still make contributions above this amount into your partner’s private pension up to their annual allowance of £60,000, or 100% of their income in each tax year. Your partner can benefit from tax relief on the contributions.
Spending the funds
Spending tax-free cash can lead to income tax savings and inheritance tax mitigation. Spending cash as part of a blended retirement strategy is a valid solution for many savers. A cashflow plan can form the basis for what you can afford to spend, or gift to children.
Each individual’s needs and circumstances will differ. In many cases a combination of planning solutions may be appropriate. Find out more by calling 03300 564 446, or get in touch using our contact form.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
