With pensions usually exempt from inheritance tax, and the tax threshold frozen until April 2028, intergenerational wealth planning can understandably focus on pension wealth as an inheritance rather than being a source of lifetime gifts.
Indeed, inheritance tax receipts reached £5.9bn in the nine-month period to January, which is £900m more than in the same period a year before, according to HM Revenue & Customs.
But where somebody has the benefit of financial security, with surplus income there may be circumstances where gifting from a pension pot may not be such a bad idea.
From a purely tax-driven perspective, it may be that a client can extract their accumulated pension wealth at a lower rate than their intended beneficiaries, says Abrdn technical manager Dave Downie.
“For example, if they can keep pension withdrawals within their basic-rate band and make lifetime gifts, it will give a better outcome if their beneficiary is likely to be a higher-rate taxpayer when they receive benefits on death,” he adds.
But there are also reasons unrelated to tax for wanting to make lifetime gifts. “The gift may be for a particular purpose that is time sensitive, such as to help with education costs or a child or grandchild to get onto the property ladder,” Downie says.
“Or it may simply be that the client would like to be alive to see their beneficiaries enjoy the benefit of their generosity.”
Turning 75
While retiring can be a milestone, a pension saver’s 75th birthday is also a significant occasion. Any further contributions no longer benefit from tax relief, says Downie, and death benefits will ultimately become taxable.
Although it is possible to still take tax-free cash after the age of 75, he adds that clients should be aware that if they die without taking their tax-free lump sum, what could have been taken tax-free from a pension will be taxable in the hands of their beneficiaries.
But taking a tax-free lump sum from a pension could expose it to an inheritance tax rate of up to 40 per cent unless the sum is spent or gifted, and outside of the estate for IHT purposes when the pension saver dies, Downie notes.
“Making a lifetime gift of the remaining tax-free cash at age 75 will of course mean the client will need to survive until their 82nd birthday for it to be outside their estate,” he says. “However, gifts could be immediately outside the estate if they satisfy the conditions for the ‘normal expenditure out of income’ exemption.”
But statistically, a lot of people would survive, says Clare Moffat, head of the intermediary development and technical team at Royal London. The average life expectancy of a 75-year-old male and female being 87 years and 89 years respectively, according to the ONS.
On the other hand, some people like the idea that money remains available in a pension, says Moffat; and whether lifetime gifting from a tax-free lump sum is worth considering also depends on the rate of tax that their beneficiaries would pay – with younger grandchildren, for example, also benefiting from the personal allowance.
