PERSONAL PENSIONS – ARE THEY STILL WORTH IT?

Currently, defined contribution pension pots do not form part of your taxable estate on death. This makes them a popular vessel for passing on wealth to future generations without incurring an inheritance tax (IHT) charge, providing they remain untouched.

However, from 6 April 2027, the IHT treatment of pension pots is changing and they will be brought in to form part of your taxable estate on death. For estates with a value in excess of the nil rate band (currently £325,000 per person), this means pension pots will now be subject to an IHT charge of 40%.

For those who pass away after the age of 75, the beneficiaries will also be subject to income tax on receipt of the pension income. This can result in an effective tax rate of over 60% in some cases, which begs the question, is it still worth investing in a pension?

While the tax advantages for pensions on death are due to come to an end, they can still provide tax saving opportunities during your lifetime.

Contributions made into a personal pension benefit from a 20% top-up from the government, essentially providing basic rate tax relief. In addition, higher rate and additional rate taxpayers can extend their basic rate and higher rate tax bands by their gross pension contributions. This means more income will be taxed at a lower rate, saving up to 20% tax.

For example, a higher rate taxpayer that makes monthly contributions of £1,000 into their personal pension will receive an additional £200 by way on a government top up, totalling £2,400 in a single tax year. On top of this, their basic rate band of £37,700 will increase to £52,100, saving them tax of £2,880 a year.

Pensions can also provide a useful source of income in later life, particularly where significant care costs start to be incurred, such as planning for your future income requirements. Our Financial Planning team would be delighted to assist you with this.

It is worth noting that the amount you can contribute into a pension in any one tax year is limited by your annual allowance and net relevant earnings. This includes both personal contributions, those made under salary sacrifice and by your employer. The standard annual allowance is currently £60,000, but this can be subject to tapering depending on your income levels. Contributions made in excess of your annual allowance or net relevant earnings can result in tax charges or the withdrawal of the government top-up.

If you would like assistance in determining your available pension contribution allowances or advice on your IHT position, please get in touch with a member of the personal tax team who would be happy to help.