Ah the pensions whisper shimmer in the haze of summer lawns

Having survived having to field questions on what the Budget might do for pensions, rather than settling back to balmy summer sunsets over golden tinged fields of dreams, we now have the prospect of nearly three years of pensions and IHT discussions.

Despite the fact that it should not have been needed, hopefully a lot of people have learned Lesson 1 of Pensions and Budgets : Never ever take action over rumours, especially rumours about the loss of Tax Free Cash rights.

That there are now people trying to find ways to put back into their pension what they took out in fear of the removal of Tax Free Cash rights shows that not everybody got the message of Lesson 1.  Despite 18 years of recent pensions precedents, where any reduction in Tax Free Cash Rights was accompanied by the right to elect to Protect what one already had, this was ignored in the face of manufactured fear of losing your entitlement.  If you were lucky, it was the first time you had touched your pensions, you hadn’t ticked the box to waive cooling off rights and the contract allowed for a 30-day cooling off period that you were able to use to reverse a poor decision.  If you weren’t, then you could have made a very bad decision.

Moving on from that, the one big change that did come through, as we suggested it would, was a change to pension death benefits, with pension funds being brought into Inheritance Tax on death.

Lesson 2 of Pensions and Budgets : major changes are never easy and if done quickly then may be done badly.

We still have HMRC correcting problems created by the removal of the Lifetime Allowance because Lesson 2 wasn’t heeded.  So this time, the Government has taken Lesson 2 to heart and the timeline for changing the position on death is 2025 – consultation, 2026 – legislation, April 2027 – implementation.

So yes, the position is changing; no we do not know exactly how it will all work; yes there is time for things to change and decisions to be made based on knowledge rather than assumptions; so, no, there is no need to be doing something immediately.

I cannot stress this last point too much.  There is no need to be doing something now.  There is certainly no need to be doing something now, that could be difficult to undo, based on what might, or might not, be happening in 2027.

Unfortunately I have already had someone say to me “my solicitor has said that many people are buying annuities and using the income to pay for a life policy to pay out on their death”

There is so much wrong with this statement that it is difficult to know where to start

Where I am going to start then is that any such statement has to be incorrect, because it is far too soon since the Budget for there to be any data available to show any change in behaviour and any increase in the purchase of annuities.  So this can only be based on misinformation.

It may be that it was simply misinterpreting someone suggesting that this might happen, as life policies written in trust are one way of mitigating the impact of IHT on what your beneficiaries get.  It might also be listening to someone who has seen an opportunity to sell life policies on the back of the policy change and is starting the sales process early, probably based on earning large amounts of commission for very little work (life and health insurance policies still allow commission payments and they can be very big).

Taking this sort of approach before the consultation on what the rules will look like has even got going would be madness to be frank.  One can cancel a life assurance policy and stop paying the premiums.  Emotionally this can be difficult after a while because of the “sunk cost” of what you have paid so far, especially if there is no value to be returned as is often the case.  Purchasing an annuity however, even if bought for a fixed term rather than lifetime, is not something that can simply be changed when you know what the rules are actually going to be.

As with taking tax free cash out of your pension before the Budget, doing something that could be permanent before you know what is actually going to happen is not sensible.  Even more so with something related to Inheritance Tax given that it may be 20, 30 or 40 years before you die and one thing that you can bet on is that the rules will change again.

What should you be doing then?

It is clear that from 2027 pension funds will become subject to Inheritance Tax, even if that might later be reversed by a Government of a different hue.  Whether there will be other changes, such as to the taxation of pension funds on death after age 75 to avoid double taxation, is unknown.

So if you have been planning on the basis of using non-pension cash and investments to meet your spending in retirement, rather than drawing from your pension which you would leave to your children, it is worth revisiting your planning and considering whether this will continue to be the best option.

• If the issue becomes one of 40% IHT on the pension fund versus 40% IHT on the non-pension funds, you may decide not to make any changes for the time being and see what happens with a change of Government;
• If the issue is one of 40% IHT plus income tax on pension funds versus 40% IHT on non-pension assets, you may decide to draw from the pension, paying 20% and 40% income tax and spend more money, or use it for gifting;
• You may revise what assets you use for charitable gifts;
• You may look to place non-pension assets somewhere that benefits from Business Relief;
• You may consider a life policy to replace what may be lost to IHT, but I would suggest looking at fee-based rather than commission options if you do so.

So avoid those who come to you with glib, simple answers such as “many people are buying annuities now and using the income to pay life policies” and instead speak with a proper independent financial planner and plan before you act.

There are a lot of options available and in all of this the one thing not to lose sight of is that the purpose of building pension funds was to support you when you cease work.  First and foremost you need to be aware of what you want your retirement to be like, what the cost of that lifestyle will be and what you need to have in order to be able to do this.

There is more to life than dying wealthy and leaving lots of money to the beneficiaries of your estate; there has to be more to life than that otherwise what is the point?

The Financial Conduct Authority (FCA) does not regulate Inheritance Tax Planning or Trust Advice