Affluent savers express strategies to bypass inheritance tax levy on pensions by increasing vacation expenditures.
Retirees are planning to splurge on vacations to dodge a new inheritance tax levy, a survey reveals. Starting in April 2027, pensions will become subjected to death duties like property, savings, and investments, similar to other assets.
More than half of over-45s with at least £300,000 saved for retirement plan to spend more to avoid the inheritance tax, with taking holidays being their top choice. Enjoying experiences with family and making gifts to family were their secondary preferences.
"The results of our survey back up what we have experienced in terms of enquiries since October's Budget," says Daniel Hough, a financial planner at RBC Brewin Dolphin. He adds that retirees and those nearing retirement are increasingly looking to spend more of their pension rather than risk a substantial portion of it being lost to inheritance tax when they pass away.
With the addition of family homes, the raid on pensions will bring more workers saving for retirement retirement pots under potential inheritance tax scrutiny. While £300,000 is a substantial pension, those who have worked and saved through the era of defined contribution pensions will need more than this to be comfortable.
The Pension and Lifetime Savings Association's benchmark figures suggest that a moderate retirement for an individual would cost £31,300 after tax, excluding housing costs. A £300,000 pension pot at an industry-standard 4 percent withdrawal rate would only provide a retirement income of £12,000 a year. Combined with a full state pension of £12,000 a year, this would bring total income of £24,000 before tax.
Hough suggests that the exorbitant majority of respondents planning to spend more on holidays are unsurprising, considering the number of cases where parents or grandparents have decided to pay for five-figure family trips to provide special experiences.
Set to remove the opportunity for individuals to use pensions as a vehicle for inheritance tax planning, the Government announced in the Autumn Budget that it is bringing unspent pots into the scope of inheritance tax. Currently, only the richest 4 to 5 percent of families pay inheritance tax, charged at 40 percent on assets above the key thresholds, though this is expected to rise significantly when pensions start being counted towards the levy.
With frozen thresholds and higher property values inflating inheritance tax bills, the Treasury is now projected to collect a total of £66.9billion between 2024 and the end of the decade, with the annual take hitting £14.3billion by the end of that period.
In addition, the Government's plan to impose inheritance tax on death benefits has received less attention but could be even more significant to some grieving relatives.
Tips to Avoid Inheritance Tax on Pensions
- Invest in IHT-exempt assets: Consider investing in Venture Capital Trusts (VCTs), business or agricultural property (within certain limits) to benefit from IHT reliefs.
- Lifetime Gifts: Make gifts more than seven years before death or gifts from your income to take advantage of IHT exemptions (subject to conditions).
- Update death benefit nominations: Ensure your death benefit nominations are up-to-date and reflect your wishes under the new rules. Reconsider leaving pensions to a spouse or civil partner if they will benefit from exemptions.
- Pension drawdown & gifts: Gradually draw down pension funds and gift the excess to reduce the value of your estate.
- Top up family members’ pensions: Diversify your pension savings by contributing to the pensions of family members (subject to annual and lifetime allowances).
- Marriage or Civil Partnership: Consider partnering with a long-term partner to secure spousal exemptions.
- Holistic Estate Planning: Seek professional advice to review all assets and develop a tailored estate plan that considers the new IHT rules for pensions.
- Retirees are planning to spend a significant portion of their savings on vacations to bypass a new inheritance tax levy, which will make pensions subject to death duties like property and investments, starting in April 2027.
- The survey reveals that over half of over-45s with at least £300,000 saved for retirement are planning to spend more to avoid the inheritance tax, with holidays being their top choice.
- Daniel Hough, a financial planner at RBC Brewin Dolphin, states that retirees and those nearing retirement are increasingly looking to spend more of their pension rather than risk a substantial portion of it being lost to inheritance tax when they pass away.
- With the addition of family homes, the inheritance tax scrutiny will extend to more workers saving for retirement, as under the new rules, pensions will be subjected to the inheritance tax, including savings, property, and investments.
- With a £300,000 pension pot, the yearly retirement income provided at an industry-standard 4 percent withdrawal rate would only be £12,000, while the cost of a moderate retirement for an individual would be £31,300 after tax, excluding housing costs.
- Hough suggests that the majority of respondents planning to spend more on holidays are unsurprising, considering the number of cases where parents or grandparents have decided to pay for expensive family trips to create special experiences.
- The Government announced in the Autumn Budget that it is bringing unspent pension pots into the scope of inheritance tax, aiming to remove the opportunity for individuals to use pensions as a vehicle for inheritance tax planning.
- To mitigate inheritance tax on pensions, consider using IHT-exempt assets, making lifetime gifts, updating death benefit nominations, gradually drawing down pension funds and gifting the excess, topping up family members’ pensions, partnering with a long-term partner, or seeking professional advice for holistic estate planning.
