IHT changes driving increased use of tax-free pension cash for gifting

Around one in four people plan to access their tax-free pension cash and make use of their allowances to gift to their beneficiaries, rather than passing it on through inheritance after death, according to Hargreaves Lansdown.

Its research highlighted the impact of pensions coming into the scope of inheritance tax (IHT) from April 2027 on retirement planning.

Prior to the change, many planned to spend their other assets first and leave their pension for as long as possible, so it could be passed on free of IHT.

However, since the rule change, people are reconsidering and assessing what they can do to reduce the value of their estate to reduce their IHT liability.

Nearly a quarter (22 per cent) said they would draw an income from their pension and make gifts alongside it, while the same proportion planned to gift but would use assets outside of their pension to do so.

“The inclusion of unused defined contribution pensions in estates for IHT purposes from next April is having a major impact on retirement planning,” commented Hargreaves Lansdown head of retirement analysis, Helen Morrissey.

“It’s understandable why people would consider gifting to loved ones as a means of reducing the value of their estate. Gifting to loved ones while you are still alive not only potentially saves them a tax bill but can also help them to meet their financial goals that bit earlier.”

Despite this, Morrissey warned that it was important people understood the ramifications before acting, as while there are several different gifting allowances that can be used to reduce IHT bills, they can be complex.

The analysis showed that 27 per cent of people planned to access financial advice before making gifting decisions.

“Advisers can play a vital role in making sure that you not only gift sustainably but also that your gifting does not fall foul of any rules that could leave your family with a large bill,” Morrissey concluded.

This article originally appeared in our sister publication Pensions Age.

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