The famous 17th century French mathematician Blaise Pascal once said that “We sail within a vast sphere, ever drifting in uncertainty, driven from end to end”. It is unlikely that the great Pascal ever took out a pension, but his words fairly sum up where we have been and continue to be in the world of pensions right now, when it comes to the area of tax, says Steve Berridge, IFGL pension’s technical manager.
In her October 2024 budget, Rachel Reeves dropped a bit of a bombshell. It has to be said that many in the pension media were expecting a bombshell, but this one has perhaps taken the industry by surprise due to its severity. From April 2027, it has been proposed that discretionary payment pension schemes will fall within the scope of UK inheritance tax for the first time.
Some commentators had speculated that a move like this might be on the cards, but most felt that the inheritance tax hit would only kick in where someone’s pension fund exceeded the lump sum and death benefit allowance (LSDBA) of £1,073,100. But no, any pension fund of any size will be added to the value of someone’s estate and if that estate value exceeds their available nil rate band and residential nil rate band, where applicable, inheritance tax will apply.
In the budget, the Government announced a consultation after which the full details would be published. This consultation finished on 22 January 2025 and the information on the Gov/UK website advised that full details would be published “later this year”.
Time moves on quickly and we are now just four weeks away from the next spring statement. In the meantime, advisers and technical staff are doing their best to field questions from worried policyholders who are understandably worried about their future inheritance tax liability.
To add to the mix, the Government also announced in the last budget the final form of the abolition of the non-dom regime, which takes effect in April 2025. This will potentially bring into the scope of UK inheritance tax for the first time certain individuals who have lived in the UK for at least ten of the last twenty years. Oh and let us not forget the farmers who have been hit with their own tax whammy, thanks to the changes made to agriculture property relief
Unsurprisingly there has been a huge amount of negative press following the budget and the Government announced in January that they were considering rowing back on the non-dom changes. Again, we don’t know what that means.
So here we are in a world of uncertainty and those of us working for pension providers struggling to know quite what to say to our policyholders.
The wisest action probably right now, is to wait. We saw recently people withdrawing their pension commencement lump sums anticipating them being removed in the budget and then regretting their haste when these tax-free lump sums were left untouched.
It is however extremely damaging to consumer confidence to be in this limbo situation.
Whether Rachel Reeves will reference the pension inheritance tax changes on March 26th is unclear, but it really would be welcome if some of the uncertainty could be removed. Also welcome would be a little “rowing back” on the severity of the proposed changes. The application of inheritance tax and income tax together on pension death benefit payments could have very severe consequences for some beneficiaries.
These are some of the details that need attention before April 2027.
So dear chancellor, please do not let this uncertainty prevail for much longer. The pension industry, its clients and advisers need some clarity, as soon as possible.
By Steve Berridge, IFGL pension’s technical manager
