Inheritance Tax: The Little-Known Route to Saving Thousands

As parents, we all dream of leaving a nest egg for our children, but with inheritance tax receipts reaching an all-time high of £7.5 billion between March 2023 and April 2024, it’s clear that this dream can quickly turn into a nightmare. However, there is a little-known route to avoiding losing thousands to the taxman.

Inheritance tax receipts have reached an all-time high

While gift allowances are a common strategy to reduce inheritance tax bills, contributing more to your pension can also be a tax-efficient way to pass on wealth to your loved ones. Most pensions sit outside of your estate, making them not liable for inheritance tax (IHT).

“It’s a little-known fact that most pensions sit outside of your estate, and so they’re not liable for inheritance tax (IHT).” - Mike Ambery, retirement savings director at Standard Life, part of Phoenix Group

This means that you can save significant sums and benefit from largely tax-free growth of your savings within a pension, and then pass it on without paying IHT. The removal of the pension lifetime allowance in April adds to the potential tax efficiency of this method.

If you die before the age of 75, your pension can be paid to a beneficiary tax-free. If you die after 75, they can be paid at your beneficiary’s marginal rate. However, it’s essential to keep your beneficiaries updated, as you can’t specify who you want to receive your pension in your will.

Pension funds can be passed on tax-free

The potential advantages of using pensions to transfer wealth are significant. Inherited funds that remain invested will continue to benefit from tax-free growth until the beneficiary withdraws them. The pot can even be returned to beneficiaries (which does not impinge on their ability to fund a pension) or left for future generations.

Passing on wealth to loved ones

A common misconception is that inheritance tax is only for the wealthy, but with rising property prices and a 20-year freeze on the inheritance tax threshold, more families are being pulled into the net, causing bills to grow. In fact, the proportion of deaths resulting in inheritance tax is estimated to grow from 4% to over 7% by 2032/33.

The inheritance tax threshold has been frozen for 20 years

Inheritance tax is usually charged at a rate of 40% on the portion of the estate over the £325,000 threshold. By considering contributing more to your pension, you can reduce your inheritance tax bill and pass on more wealth to your loved ones.

Pension planning can help reduce inheritance tax

It’s essential to check the rules of your pension scheme and seek advice if possible, so you can make the most appropriate choice for your circumstances. By being aware of this little-known route to saving thousands, you can ensure that your hard-earned wealth goes to those who matter most.