Tax rules are always subject to change, and the recent announcements in the Autumn Budget regarding pensions and inheritance tax (IHT) have sparked widespread discussion about their potential impact on intergenerational planning.
A key question arising is whether the removal of IHT exemptions for many pension schemes means clients with an IHT liability should consider moving money out of pensions and into alternative tax-efficient wrappers.
Although it’s premature to make decisions based on changes not set to take effect until April 2027, there are scenarios where leaving funds in unused pensions might be less tax-efficient than withdrawing them. For individuals with an IHT liability, the main concern with accessing pension funds is that the withdrawn money becomes part of their estate and subject to IHT.
Gifting is one option to reduce IHT exposure, but it comes with the caveat of the seven-year rule, where the gift only becomes IHT exempt if the giver survives for seven years. This can make the tax advantages of leaving funds in a pension less clear-cut.
In these situations, it may be worth exploring the normal expenditure out of income exemption (NEOOI). Qualifying gifts under this exemption are immediately excluded from the estate, offering significant IHT benefits. As there’s no cap on the value of gifts that can qualify, NEOOI is arguably one of the most valuable IHT exemptions available.