A solution to the Government including Personal Pensions in your estate

Firstly the new changes do NOT come into play until April 2027.

Secondly it is possible that the initial plans are amended. In particular this refers to deaths after aged 75 where you children could be hit with both IHT (Inheritance Tax) as well as income tax at their marginal rates.

If you die before 75, there is no income tax to pay on pension receipts by your children.

No tax will be payable on first death if you are leaving the pension to a spouse. If you are not married, tax is due on first death.

The following solution uses a joint life second death insurance policy, as IHT is payable on the death of the second married couple. These policies are available to unmarried couples but will not be of much use if IHT is required to be paid on first death.

Basically the retiree draws down a taxable income from their retirement pot on a regular basis (typically monthly). Tax is payable on this amount with the remainder being used to fund a joint-life second-death insurance policy. This policy must be written in trust or the amount payable (sum assured) will be liable to IHT too.

For example, a 65 year old couple can take out a £500,000 policy for a premium of £687 a month. If they both died a year later, they would have paid out £8244 and would get back £500,000. If the second died at 75, they would have paid out £74,196 and would make a profit of £425,120. At 86, they would have paid £164,880 making a profit of £335,120. The survivor would need to survive until aged 127 before they would have paid more in premiums than the amount paid out.

By using the pension to fund the premium, you are reducing the amount of the pension fund and therefore the tax payable and you will not be having to find the premium from your other income.

This "top tip" is based on current understanding of the Budget proposals and is subject to change. Please remember there are NO changes until April 2027.

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