If the inclusion of your pension in your estate has the potential to increase the amount of IHT payable, you might consider revising your retirement plan. Here are three potential approaches:

Increase Spending in Retirement:

The upcoming IHT changes could serve as a catalyst to reassess your retirement lifestyle and explore new possibilities. By spending more of your pension during your lifetime, you might effectively reduce the value of your estate below the IHT thresholds or lower a potential tax bill.

The interactive investor survey[1] revealed that 19% of respondents are considering withdrawing more funds from their pensions with the intention of gifting it, while 6% are contemplating earlier retirement.

Therefore, if your goal is to utilize more of your pension during your lifetime rather than leaving it as an inheritance, now might be the time to envision how an increased income could enhance your retirement. Perhaps you’ve dreamed of an unforgettable trip or want to dedicate more resources to hobbies, charitable causes, or simply enjoying a more active lifestyle.

However, it’s crucial to balance increased spending with the long-term sustainability of your retirement funds. A comprehensive financial plan can help you determine whether increased pension withdrawals could risk depleting your savings later in life.

Another factor to consider is the potential impact of higher pension withdrawals on your Income Tax liability in retirement. Pension withdrawals are added to any other sources of income when calculating your Income Tax, meaning a larger pension income could inadvertently push you into a higher tax bracket.

Utilize Your Pension for Lifetime Gifting:

If your previous intention was to leave your pension to loved ones as an inheritance, making gifts during your lifetime could be a viable alternative. This could involve withdrawing a regular income or a lump sum from your pension to pass on to your beneficiaries.

Gifting wealth during your lifetime can potentially be more beneficial to your loved ones than a future inheritance. It could provide them with the means to purchase their first home, contribute to wedding expenses, fund education, or simply improve their immediate financial well-being.

When considering lifetime gifts, it’s important to be aware of the “seven-year rule.” If you gift assets and pass away within seven years of making the gift, the value of that gift could still be included in your estate for IHT purposes. Therefore, making gifts earlier in your retirement could be advantageous if your aim is to reduce a potential future IHT liability.

Again, it’s essential to remember that withdrawing lump sums from your pension could increase your Income Tax liability, and gifting assets could potentially impact your own long-term financial security.

Reduce Your Pension Contributions:

The interactive investor survey indicated that 8% of participants are considering reducing their pension contributions in response to the upcoming IHT changes.

For some individuals, this might be a suitable decision. For instance, if you have already accumulated sufficient pension wealth to support yourself comfortably throughout retirement and wish to redirect funds to other assets that can be passed on more tax-efficiently. However, it’s vital to carefully evaluate your options and avoid making hasty decisions.

While the value of your unspent retirement savings may become subject to IHT upon your death, pensions often offer significant tax advantages during your lifetime. For example:

• Pension contributions typically benefit from tax relief.
• You can usually withdraw 25% of your pension (up to £268,275 in the current tax year) tax-free.
• Investment growth within your pension is generally exempt from Capital Gains Tax.

Therefore, while your pension’s value might influence your estate’s IHT liability, maintaining or even increasing pension contributions could still be tax-efficient when considered within the context of your broader financial plan.