Britain's savers are pulling money out of their pensions earlier than usual, attempting to get ahead of the introduction of inheritance tax on unspent defined-contribution pensions next April. At St. James's Place Plc, the UK's largest wealth manager, regular pension withdrawals increased by about 17% in the third quarter compared with a year earlier. Analysts at Royal Bank of Canada and JPMorgan Chase & Co. said the upcoming inheritance tax changes contributed to the increase.
Those figures reflect a broader picture. Tax-free withdrawals from pensions rose by about 20% last year, reaching more than £22 billion ($29.5 billion), according to data from the Financial Conduct Authority. And more than four in five estate practitioners say their clients are taking out money from their pension funds earlier or faster than planned, a survey by the Society of Trust and Estate Practitioners found.
A similar proportion of respondents said that clients had changed their estate planning because of the inheritance-tax announcement. "We're going to see a bit of an avalanche in terms of inquiries," said Chris Black, director and wealth manager at RBC Brewin Dolphin, adding that the business is already having daily conversations with clients about the changes. "A lot of our clients started thinking about pensions as a core part of their estate succession plans, if not the primary vehicle for estate and succession planning," he said. Traditionally, better-off retirees have tended to draw down on their pensions later in life, since any unused assets could be passed on to their beneficiaries tax-free. That thinking has "now pretty much turned on its head" as a result of the incoming tax reforms, said Ed Wood, financial planning director at Rathbones Group Plc, a wealth management firm.
From April, any cash that remains in a direct contribution pension after its owner dies will count toward the value of their estate. If the total estate is more than £325,000 (or £500,000 in most cases where a home is passed down to direct descendants), the excess will be taxed at 40%. Any unused allowance can be transferred to a spouse or civil partner, meaning some couples can pass on up to £1 million tax-free.
The government expects an additional 10,500 estates to be liable for inheritance tax after the changes. About 30,000 estates incur an inheritance tax charge each year, as of 2024. The Treasury has said the reforms are intended to stop pensions being used "as a tax planning tool to transfer wealth without an inheritance tax charge, rather than for funding retirement." It forecast that the measure will raise about £5.5 billion by the end of the 2030-31 financial year.
Pension beneficiaries could face paying both inheritance tax and income tax at their marginal rate if the pension holder dies aged 75 or older, because HM Revenue & Customs classes such beneficiary pension withdrawals as income. "There is going to be tax on the pension funds when they are paid out, regardless of who they're paid to," Wood said. "It will often make sense to start things sooner rather than later." There are "lots of legitimate ways to mitigate inheritance tax," said Claire Trott, head of advice at St. James's Place, adding that the changes won't affect most households. Individuals have an annual gift allowance of £3,000 and can also give away larger lump sums, which no longer count toward an estate once seven years have passed. But before gifting money to children and grandchildren, savers must consider their own wellbeing in later life, Trott said. "With university fees or school fees, there's an end date," she said. "With care, there is an end date, but we just don't know when it is.
It could be a lot longer than you think.".
Source: Bloomberg Markets · Summarized by HeadlinesBriefing