The first budget of the new UK government has a few surprises for sure, one, in particular, is for pensioners looking to pass on their pensions as inheritance to their children, or for children looking to inherit their parent’s unused pensions. While in the past, private pensions did not fall under a person’s “estate” for Inheritance Tax (IHT) purposes, that is going to change from 6 April 2027, post which private pensions will be fair game for the taxman. Now while these changes won’t affect everybody, if you do happen to be affected by it, many are referring to it as a “double tax” on inherited pensions and here’s why. According to the current rules, if you inherit an unused private pension from someone who has died after the age of 75 you pay income tax on it which can be as high as 45%. If you inherit it from someone who died before the age of 75, however, you avoid this inheritance tax.
This led a lot of people to save money in their pensions and use other sources of income during their retirement, in order to pass their unused pensions on as inheritance while avoiding inheritance taxes. After the changes proposed by 2027, however, even if you inherited an unused pension from someone who has died before the age of 75, you will still have to pay an inheritance tax to HMRC of 40%, plus an income tax on further withdrawals which can be as high as 45%, hence the “double tax” moniker. A lot of people feel like this will discourage people from using their pension funds as savings instruments and is unfair to single pensioners and those wanting to leave some money behind for their children.
What’s interesting about the new rules is that there’s no inheritance tax if you want to leave your unused pension behind for a spouse or a legal partner, but there is if you want to leave it for your children. According to the new rules, if you inherit a pension fund worth £100,000 from someone who died before the age of 75, you will immediately have to pay £40,000 to HMRC, plus an additional income tax on every withdrawal you make after that. This is assuming the worst case scenario, of course, where you have used up your tax-free inheritance allowance, The UK government stated in reference to the new budget changes that “removing the opportunity for individuals to use pensions as a vehicle for inheritance tax planning”. Incidentally, a number of UK law firms have reported pensioners rushing to rewrite their wills in order to avoid this new inheritance tax on private pensions.
QROPS FAQs
What are the key benefits of a QROPS Pension Transfer?
- Tax efficiency
- Easier to keep track of taxes and regulations.
- Avoid UK income tax on pension and distribution which is as high as 40%, as well as death tax which is up to 55%.
- No capital gains taxes on investments.
- Investment opportunities
- Opportunity to invest in one of the world’s top 10 stock markets.
- Opportunity to invest in fixed interest schemes with guaranteed interest rates of up to 10.5%.
- Convenience
- No requirement to buy an annuity
- Flexible investment options with a lot less restrictions than in the UK
- No money lost due to currency exchange rates
- No Inheritance Tax
How do I know if I’m eligible to apply for QROPS?
The following pension schemes are eligible for QROPS transfer:
- Occupational scheme
- Final salary scheme
- Defined benefit scheme
- Defined contribution scheme
- Self-invested personal pension scheme
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