Up to 5 April 20247 unused funds in a pension pot at the date of death are excluded from the taxable estate for inheritance tax purposes. Typically this will apply more to newer defined contribution schemes, while older defined benefit schemes typically lapse on death anyway, and is implemented by means of a letter of wishes sent by the pensioner to the trustees of the pension scheme.
The government will bring unused pension funds and death benefits payable from a pension into a person’s estate for Inheritance Tax purposes from 6 April 2027.
Life insurance
Life insurance policy products are not affected. This makes them attractive products.
Income tax
The current position is that pensions accessed by relatives after the death of the pensions are subject to income tax. There are some discussions in policy circles about the possibility that this charge will be removed in light of pensions also becoming subject to inheritance tax, but at this stage there is no reason to think that unused pension pots would not be subjected to two layers of taxation.
Mitigation strategies
One side effect of the budget is that longer term interest rates may be higher than would otherwise be expected, and it may become more attractive for pensioners with an estate in excess of the £325,000 nil rate band to purchase an annuity, or draw down and invest or expend pension funds.
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