Amid speculation of inheritance tax cuts in the upcoming Budget, new research from PensionBee reveals that nearly two-thirds (62%) of Brits are unaware that pensions usually sit outside of their estate, and in most cases won’t count towards their inheritance tax threshold when they die.
Among those who recognised that pensions are usually exempt from inheritance tax (39%), there was a nearly equal division between those who plan to, or already have moved money into their pension to reduce the size of their estate (51%) and those who haven’t previously considered doing this or are undecided (49%). Working age savers (18-54) were more likely (57%) than those aged 55+ (27%) to respond that they plan to, or already have moved money into their pension to reduce the size of their estate.
When asked about what inheritance tax changes they’d most like to see in the upcoming Spring Budget, the most popular response for over 55s was that they’d like to see the policy abolished completely (30%), but only 15% of young savers (age 18-34) agreed.
Instead, young savers favoured a more means-tested approach, with nearly a third (31%) reporting that they believe there should be exemptions or reduced rates for specific categories such as family homes or small businesses. The next most popular choice was the introduction of a sliding scale for inheritance tax based on the value of the estate (20%).
Becky O’Connor, Director of Public Affairs at PensionBee, commented: “One of the benefits of saving into a pension rather than some other investment products or assets is that money held in a pension is usually free from inheritance tax because it is considered outside of someone’s estate.“Our research suggests the majority of people don’t know about this benefit. The risk of someone not knowing is that estate beneficiaries could ultimately miss out or pay more tax than necessary on someone’s life savings and investments.“It’s important to understand pensions and the way they are taxed for successful long-term financial planning. Inheritance tax planning is one area where pensions may be being underused.”
Tips from Becky O’Connor
Consider pension drawdown - If you have multiple sources of retirement income or other assets, it may be sensible to consider using pension drawdown. Pension drawdown allows you to keep your pension invested while taking withdrawals as needed, potentially reducing the size of your estate subject to inheritance tax.
Set up pension beneficiaries - By naming beneficiaries directly to your pension provider, you can easily pass on your pension savings after you die. The exact amount you can pass on tax-free to your beneficiaries after you pass away depends on your age and whether you have started accessing your pension. If you pass away before age 75, then beneficiaries would also benefit from not paying income tax on withdrawals from your pension. Make sure to keep your ‘nomination of beneficiaries’ form up-to-date.
Review financial planning regularly - Personal circumstances and financial situations can change over time, so it’s essential to review your pension arrangements and estate planning regularly. This ensures that your plan remains aligned with current goals and objectives and ensures maximum benefit from pensions exemption from inheritance.
Pensions and inheritance tax facts and figures
Inheritance tax is charged on the value of an estate above the £325,000 threshold. This is known as the nil-rate band.
The standard rate of inheritance tax is 40% on the value of an estate above the nil-rate band.
There’s also a main residence nil-rate band that allows people to leave their homes to family tax-free. Under the rules, those passing their home to a direct descendant can benefit from £175,000 in tax-free allowance (2023/24). Married spouses and civil partners may be able to apply any unused allowance of their deceased partner, meaning that they can pass on as much as £1,000,000 as a couple.
Individuals can gift up to a certain amount each tax year without incurring inheritance tax. This is known as the annual exemption (£3,000 per individual), and it can be carried forward for one year if unused. There are also exemptions for certain types of gifts, such as wedding gifts or gifts to help with living costs.
Estate planning can help minimise the impact of inheritance tax on beneficiaries. This may include making gifts during their lifetime, setting up trusts, or making use of exemptions and reliefs.
Table 1: Are you aware that pensions are usually exempt from inheritance tax?
| Question | Response |
|---|---|
| No, I wasn’t aware that pensions are usually exempt from inheritance tax | 52% |
| Yes, I was aware pensions are usually exempt from inheritance tax | 39% |
| I’m not sure/I don’t know | 10% |
Source: PensionBee, February 2024. 1,000 UK adults (nat rep). All numbers have been rounded.
Table 2: Do you plan to or already have moved money into your pension to reduce the size of your estate?
| Question | Total Responses | Working age (18-54) | At retirement (55+) |
|---|---|---|---|
| No, I haven’t considered using my pension to reduce the size of my estate. | 40% | 35% | 60% |
| No, but I plan to move money into my pension to reduce the size of my estate. | 30% | 34% | 16% |
| Yes, I’ve already moved money into my pension to reduce the size of my estate. | 21% | 23% | 11% |
| I’m not sure/I don’t know | 9% | 8% | 13% |
Source: PensionBee, February 2024. 385 UK adults (nat rep). All numbers have been rounded.
Table 3: There’s been speculation that the government may change its inheritance tax policy. Which change would you most like to see? Please select one option.
| Question | Total responses | Age 18-34 | Age 35-54 | At retirement age (55+) |
|---|---|---|---|---|
| Exemptions or reduced rates for specific categories such as family homes or small businesses | 24% | 31% | 21% | 18% |
| Abolishing the policy completely | 22% | 15% | 25% | 30% |
| An increased threshold for inheritance tax from £325,000 | 21% | 19% | 24% | 18% |
| A sliding scale for inheritance tax based on the value of the estate | 18% | 20% | 16% | 17% |
| Stricter regulations to prevent tax evasion from inheritance tax collection | 15% | 15% | 14% | 17% |
Source: PensionBee, February 2024. 1,000 UK adults (nat rep). All numbers have been rounded.
