Essential Financial Knowledge Every Child Should Learn from Their Parents Immediately
In the upcoming UK Autumn Budget, significant changes are expected to be implemented regarding how unused pension funds are treated for inheritance tax (IHT) purposes. Starting from 6 April 2027, unused pension savings—such as those not yet drawn down or converted into income products—will be brought into a person’s estate and thus potentially subject to inheritance tax.
Currently, unused pension funds and certain death benefits can often be passed to beneficiaries free from inheritance tax, especially when paid at the discretion of pension trustees. However, the new rules aim to remove this exemption so that these unused pension amounts become part of the estate value assessed for IHT, aligning pension death benefits with other wealth transfers for tax purposes.
Notable related points and clarifications include:
- Certain exclusions: Non-discretionary death-in-service lump sums and trivial commutation lump sums for dependants’ pensions, as well as joint life annuity payments to survivors, will be excluded from IHT under the new rules.
- Responsibility shift: The obligation for reporting and paying IHT on unused pension funds will lie with executors of estates, reflecting the government’s view that current rules create tax planning distortions.
- Draft legislation stage: The detailed rules are currently draft and may see fine-tuning before implementation, so individuals are advised to seek personal advice rather than take immediate action.
Regarding tax relief on contributions, no imminent changes have been proposed for pension tax relief in the upcoming Autumn Budget. The focus appears to be on inheritance tax reform related to pension death benefits rather than altering tax relief on pension contributions.
As for personal pension savings, it is crucial to have a conversation with children and urge them to start saving as much as they can afford. The future of the state pension is under scrutiny, and pensions are crucial for long-term financial well-being. Despite governments using pensions for their own means, including exploring new ways to tax them, it's essential to continue saving for a pension despite government actions that may pilfer from pensions.
In light of these changes and the importance of personal pension savings, it's worth noting that 15 million workers are at risk of an impoverished retirement unless they start saving more for a pension. To address this issue, the UK government has announced the creation of a pensions commission to design a future-proof pensions system. However, the commission's recommendations on boosting pension saving will not be published for another two years and will not be acted upon until at least 2029.
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- The upcoming UK Autumn Budget is expected to introduce changes in the treatment of unused pension funds for inheritance tax (IHT), with these savings becoming part of the estate value assessed for IHT starting from 6 April 2027.
- The changes in IHT rules regarding pension death benefits aim to align them with other wealth transfers for tax purposes, while certain exclusions such as non-discretionary death-in-service lump sums and trivial commutation lump sums for dependants’ pensions will remain exempt.
- Regarding personal finance, it is essential to encourage children to save for their pensions, given the potential changes in the state pension and the importance of long-term financial well-being. Additionally, the UK government has announced the creation of a pensions commission to address the issue of 15 million workers being at risk of an impoverished retirement and design a future-proof pensions system, although the commission's recommendations may not be published or acted upon for several years.
