Inheritance Tax on unused pension funds

For the vast majority who intend to drawdown on their pensions, exposure will likely be limited. Particularly when factoring in available nil rate bands, and the spousal exemption, which may provide sufficient relief to cover any undrawn pension on death.

However, for individuals who may be impacted, including those who were looking to take advantage of the pension’s previously exempt status as part of their overall IHT strategy, revisiting their plans is now essential.

What can you do?

In short, it depends. There is no one size fits all solution, however, consideration could be given to the following:

1. Lifetime gifting
   • Lifetime gifting offers a potential solution to reduce the overall estate.
   • The spousal /civil partner exemption allows unlimited gifting between married couples and civil partnerships, assuming both are long term residents of the UK.
   • Any individual can give away up to £3,000 each year, and use the previous year’s unused allowance, without any IHT implications.
   • Those with unused disposable income could also take advantage of the Normal Expenditure Out of Income exemption which provides relief from IHT where regular gifts are paid out of excess income.
   • Direct cash gifts which aren’t covered by any exemptions will also escape IHT where the transferor survives seven years. Individuals may consider drawing their 25% tax-free lump sum to fund the gift.
   • Gifting cash/assets into a trust for children or grandchildren is another consideration. A gift into a discretionary trust is a chargeable event for IHT, but transferors can take advantage of their £325,000 nil rate band. Additionally, any capital gains arising on chargeable assets can be held over to defer the tax until eventual sale.

2. Annuities
   Purchasing a lifetime annuity with all or part of your pension fund will immediately reduce its value for IHT purposes. There are non-tax considerations in relation to this which should be discussed with a financial advisor.

3. Insurance
   A life insurance policy could be considered to specifically cover any IHT that could become due on the pension fund. When written into trust, an insurance policy is owned by the Trustees, and therefore falls out of the individual’s estate, so an effective tool for IHT planning.

The rules on IHT are complex and professional advice should always be sought when considering planning opportunities. For more information on this, please do get in contact with your usual Crowe contact.