Tax changes for pensions in UK Budget 2024 – Introduction
The UK Budget 2024 brought both relief and new challenges for pension savers, scheme trustees, and administrators.
While some feared changes to National Insurance on pension contributions and tax-free lump sums, these concerns were unfounded.
However, significant changes to inheritance tax (IHT) on pension-related death benefits are set to take effect from April 2027, prompting a closer look at the implications.
Good News for Pension Savers
In yesterday’s Budget, there were a couple of reassuring announcements for pension savers:
- No NICs on Employer Contributions: Despite recent speculation, National Insurance contributions (NICs) will not apply to employers’ pension contributions.
- Tax-Free Lump Sums Remain Untouched: No changes were made to the tax-free status of lump sums for pension members.
However, while these aspects remain unchanged, new IHT rules will bring added complexity for scheme trustees and administrators in the coming years.
New IHT Rules on Pension Transfers
Starting immediately, the Budget extends the tax on transfers to overseas (QROPS) pension schemes, impacting those moving pensions outside the UK.
IHT on Pension Lump Sums and Unused Funds
The Chancellor has introduced new measures to include more pension-related death benefits within IHT.
Previously, only unused defined contribution (DC) funds were anticipated to be affected, but now many other death benefit lump sums, including those from defined benefit (DB) schemes, will also be subject to IHT.
This aligns with the government’s aim to prioritize retirement income for the member and their spouse or civil partner, rather than for descendants.
To implement these changes, HMRC has launched a technical consultation on the practical application of IHT to pension death benefits, with draft legislation expected in 2025.
The government has also confirmed its commitment to incentivize pension saving, maintaining tax relief on contributions and investment growth.
When Will the IHT Changes Apply?
The new IHT rules will come into force on 6 April 2027, applying the standard IHT rate of 40%.
What Death Benefits Will Be Liable for IHT?
From April 2027, the following death benefits from registered pension schemes will be included in a member’s estate for IHT purposes, unless they are left to a spouse, civil partner, or charity:
- Death in service lump sums
- Pension protection lump sums (e.g., five-year guarantees)
- Uncrystallised funds lump sum death benefits
- Survivors’ annuities or drawdown funds
Currently, where trustees have discretion over lump sum death benefits, these funds typically fall outside IHT.
However, HMRC intends to end the different treatment of discretionary versus non-discretionary death benefits.
New Reporting Duties for Pension Administrators
Starting from 6 April 202, pension scheme administrators will be responsible for reporting and paying IHT on unused pension funds and death benefits.
This shift means that:
- PRs Will Not Use Non-Pension Assets: Personal representatives (PRs) won’t need to use other assets to cover IHT on pension benefits.
- Direct Payment from Scheme: Any IHT due will be paid directly from the pension scheme, not as income in the hands of beneficiaries.
Practical Challenges in IHT Reporting
The collaboration between PRs and pension administrators will involve
- PRs notifying administrators of a member’s death and requesting death benefit valuations
- Administrators providing these values within two months, which could be challenging in practice
- PRs calculating IHT liability and sharing this with administrators, who will pay HMRC directly.
When a spouse or civil partner is the beneficiary, the exemption from IHT applies. However, if trustees need time to assess beneficiaries, meeting the two-month reporting deadline may prove difficult.
Deadline for IHT Payment
IHT payments must be reported and paid within six months of the month of the member’s death.
From April 2027, pension administrators will face this same deadline, with interest charges for late payments.
After 12 months, the member’s beneficiaries will share liability with administrators for any outstanding IHT on pension funds.
Threshold for IHT on Pension Death Benefits
HMRC expects only about 10% of estates to exceed the IHT threshold, currently set at £325,000 (with a potential extra £175,000 if a home is left to direct descendants).
Pension administrators are required to report IHT information only when payable on unused funds or lump sum death benefits.
Exemptions for Life Assurance and Top-Up Pensions
HMRC clarified that IHT changes won’t apply to certain life policy products purchased with or alongside pensions as part of an employer package.
Further consultations may address specific exclusions for excepted life assurance and unregistered top-up pensions.
Tax changes for pensions in UK Budget 2024 – Conclusion
While aspects of the Budget 2024 bring relief for pension contributors, new IHT rules on death benefits from 2027 introduce additional obligations for pension schemes and PRs.
This development could significantly impact estate planning for pension holders.
Final Thoughts
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