New inheritance tax changes: financial advisers react
The new inheritance tax (IHT) rule announced in the Autumn Budget has created a number of concerns for financial advisers; discover what a selection of advisers make of the move.
Summary
- The change to subject pension pots to inheritance tax from 2027 has caused quite a stir among consumers and advisers alike.
- Many are condemning the move, stating it’ll creating undue pressure on sensible savers and may result in double taxation.
- A number of Unbiased financial advisers have spoken to us about the change and their concerns for their clients.
One of the biggest changes announced in the Autumn Budget was that from April 2027, inherited pensions will be brought into inheritance tax (IHT).
How has the new IHT news been received?
The change to IHT has caused quite a stir among many consumers and financial advisers.
The government has opened a consultation that is seeking views from individuals, pension scheme administrators, other pension professionals, and tax and legal practitioners on the process required to implement these changes. The consultation closes on 22 January 2025.
Here is what Unbiased financial advisers think about the new rule.
The financial planning opportunities and challenges
Many financial advisers have warned that the move to bring pensions into the realm of IHT will significantly alter financial planning strategies, with consumers requiring integrated and sophisticated planning to navigate the new rules.
Nick Moules of Wren Sterling said, “We’re likely to see plans re-jigged so the order that a client uses income sources in retirement will be adjusted to make sure withdrawals are as tax-efficient as possible, to avoid paying higher rates of income tax.
“As ever, with pensions and IHT, the devil is in the detail and these changes add another layer of complexity to an already difficult area to navigate.”
David Swaby of Continuum (Financial Services) LLP also spoke to this, stating he has long warned clients about the viability of pensions forming part of someone’s estate for inheritance tax.
“This will make a significant change to the past advice given on inheritance tax planning and the use or lack thereof of pensions forming part of those plans. As such, this will make pension, investments, and inheritance tax planning much more of an important area to work on vs the current situation and will bring far more people into the realm of inheritance tax going forward,” he added.
A strategic shift in pension use could be imminent
Several other financial advisers share the belief that techniques and advice will need to be reviewed as the focus of pensions shifts back to retirement planning rather than IHT avoidance.
Many of them state there will be a need for alternative strategies in the future for those who want to preserve their money.
David Toner of True Potential Wealth Management said the use of offshore bonds is now commonplace among his clients.
“I have clients who now have IHT liabilities utilising the maximum tax-free cash from their pensions in order to fund investments in offshore bonds wrapped up in an IHT tax efficient trust; this is now a very common part of my business,” he said.
Harjit Toor of True Potential agreed. He commented that the Budget changes could “require a big rethink for those preserving money in pensions,” which he sees as a massive opportunity for advisers to provide possible solutions.
Could beneficiaries face double taxation?
Following the Budget announcement, many advisers raised concerns that the new IHT rule could lead to beneficiaries facing double taxation.
Both Owrang Rahmani of Credius Wealth and Samuel Mather-Holgate of Mather & Murray Financial stated that the possibility of a double tax hit would be a blow to those who have been using pensions to shelter wealth.
Mather-Holgate said, “If you die after 75, your pension may be taxed for inheritance tax at 40% and then again at your beneficiary’s marginal rate. I think there may be calls for Rachel Reeves to look again at this inherent unfairness in the proposed system.”
Rahmani also stressed this point, saying, “The new pension IHT rules mean beneficiaries may suffer a double tax hit. This will come as a blow to many.”
This double taxation concern could deter the use of pensions as a legacy planning tool.
As Rahmani explains, “Previously, pensions were able to be used as a legacy planning tool to pass wealth on to their heirs. This means many who have been funding their pensions will have to rethink their approach.
“Whilst this move will help fill the fiscal deficit, it will also return pensions to their original purpose of planning for retirement as opposed to IHT.”
New rules underscore the need for financial advice
One positive thing to take away from the new IHT rule is that it highlights the importance of professional financial advice in navigating complex changes effectively.
Irina Mart of Arcus Wealth and Nick Moules of Wren Sterling all referred to this, with Moules stating that the value of working with a financial adviser is even higher post-Budget.
“Often, decisions in this area of financial planning cannot be reversed, so the value of working with an independent financial adviser is arguably even higher now,” he said.
Meanwhile, Mart called on the government to ensure people receive financial advice when it comes to pensions and safeguarding their financial wellbeing.
“Such a measure would not only help to safeguard people’s long-term financial wellbeing but also reduce the number of individuals falling prey to pension scams, offering an extra layer of protection for their hard-earned savings,” she said.
While this new rule is complex and introduces a level of uncertainty, it indeed creates opportunities for financial advisers.
An undue burden is being placed on responsible savers
While the new move does highlight the need for professional financial advice when planning for retirement, many advisers are critical of the move, believing it places an undue burden on responsible savers and discourages people from saving.
James Pulham of Rafter Associates Financial Management called the move “illogical,” stating, “The inheritance tax that will be due on someone’s unused pension fund from 2027 seems illogical (short-term gain, long-term pain comes to mind) when we have a state pension ‘ticking time bomb’ and need to encourage people to build up their own private pension provision.”
Edward Lane of AFH Wealth Management also pointed out flaws in the policy, especially for those individuals saving into pensions, aspiring to home ownership, and planning to pass on their wealth to family members.
He said, “For the clients I meet, the majority fall squarely into this group. They are people who have diligently saved, bought homes, and planned carefully for the future.
“In my view, this policy is a misalignment between perception and reality.
“While the government may aim to address wealth inequality, it inadvertently places the burden on those who have saved responsibly and made prudent financial choices.”
Connect directly to consumers with Unbiased
The inclusion of inherited pensions in IHT from April 2027 represents a significant shift in financial planning, with wide-ranging implications for advisers and their clients.
The need for professional advice and strategic planning will become even more critical as people navigate their retirement planning in light of this change.
At Unbiased, we help bridge the financial advice gap and connect advisers, mortgage brokers and accountants directly with consumers.
We deliver leads straight to your inbox and give you the tools you need to convert. To date, Unbiased has connected over 10 million people to the advice they’re looking for.
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