While pensions escaped major headline changes in the Budget, several important measures emerged in the detail. Steve Berridge, Technical Services Manager at IFGL Pensions, examines the key developments affecting pension death benefits, inheritance tax and estate planning.
Initial reaction to this week’s Budget from industry was one of relief, as the Government made no headline announcements which affected pensions.
Later in the afternoon, as the full Budget transcript was read and digested, it became clear there were a few details in there that needed careful consideration. One good piece of news, the others not so good.
Firstly, the good news. The Government is removing the two-year rule from pension death benefit payments. Currently when someone dies under the age of 75, provided that the claim is settled within two years, the full fund is available to beneficiaries free from income tax.
This penalised death claim settlements delayed for reasons often outside the control of those set to benefit. This two-year rule is being removed and will apply to any payments made on or after 28 October 2028.
Also positive, whilst widely expected was the abandoning of the plan to reduce the Cash ISA limit to £12,000 from April 2027. It remains at £20,000.
Returning to pensions, a Technical Note from HMRC made two amendments to the rules bringing most unused pension funds and pension death benefits into the scope of inheritance tax (IHT).
The first change will allow prospective personal representatives to direct pension scheme administrators to pay IHT directly to HMRC in certain circumstances.
The second one concerns charitable giving and will allow those administering an estate to decide whether notional pension property should be included in the estate’s general component or treated separately when calculated whether the estate qualifies for the reduced 36% IHT rate for charitable giving.
Something which might indirectly affect pensions after April 2027, when the use of trusts is likely to increase, is the news that the Government is to clarify whether liabilities relating to trust property may reduce the value of assets for IHT purposes, which aligns their treatment with personal liabilities and strengthens anti-avoidance rules.
The bad news really is that important IHT questions on pensions remain, and we are now less than six months until the change in the treatment of pensions for IHT becomes effective.
It is an incredibly complex change which pension providers and personal representatives will be forced to grapple with, within the already tight existing six-month IHT payment deadlines. For example, how will illiquid pension assets be treated and what will be rules for valuing assets and reporting death benefits to HMRC?
Further technical guidance is expected, but the window in which to digest and implement any changes is narrowing fast!
There was no IHT reprieve for farmers and family businesses. Agricultural and business property relief remains at 50% of IHT above £2.5m.
Finally, a sting in the tail for property tax income with a rise of four percentage points from April 2027. This will affect landlords, so will the increases be passed onto tenants? The answer is likely to be in the affirmative.
To conclude then it does appear to be a continuing theme that budgets often include changes hidden away in the small print which can have a significant impact for savers, particularly pension savers. This year was no exception.
The Government obviously has significant spending commitments to meet, and these must be funded somehow. A trend has developed of raising the tax on unearned income which depending on your point of view may be a good or bad thing.
The overall tax take is still rising and the increases this time largely come from savers, landlords, people selling the business they built, banks and companies via capital allowances. How this will affect enterprise and investment in the UK remains to be seen.
For the pension industry then a mixed bag, but we will take the removal of the two year death claim window as a positive for what is usually a particularly vulnerable group of customers.
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