2024 Budget Impact on Self-Invested Pensions

Tax-Free Lump Sums

Despite worrying rumours, pension commencement lump sums (otherwise known as tax-free lump sums) were not affected. Like all pension firms we underwent a spike in requests for tax-free lump sum payments in the run-up to the Budget and would like to thank our staff for their hard work in ensuring all requests were managed in a diligent and timely fashion.

Capital Gains Tax

Capital Gains Tax was increased on the 30th October to 18% for basic rate taxpayers and 24% for higher rate taxpayers. As pension schemes do not pay Capital Gains Tax this further reinforces the benefit of investing via a registered pension scheme due to their generous tax reliefs.

Loophole of Overseas Pension Transfers Closed

An existing exemption from the overseas transfer tax charge for UK residents transferring to pension schemes based in the European Union and Gibraltar has now been closed.

Employers National Insurance 

This is increasing to 15% and the threshold lowered to £5,000. Do please note however, that employer pension contributions do not attract National Insurance and there is no National Insurance on pension withdrawals, meaning remuneration via pensions is looking more attractive than ever.

‘Pension Funds to be Included in the Deceased’s Estate for Assessment of Inheritance Tax’

This was the big headline-grabbing announcement.

The main points are as follows:

• No changes are due to be implemented until April 2027. There is therefore no need to panic or make any hasty decisions.
• It is important to note that death benefit designation to spouses or civil partners will be exempt from assessment for Inheritance Tax. These new proposals will therefore only apply on the second death for couples.
• Please don’t be swayed by what you may read or hear on social media. There can be a lot of misleading information available and nobody has more detailed information than is currently available in the consultation, which is also open to change.  We always recommend that you speak to a regulated financial adviser before making financial decisions.
• There is currently a Treasury consultation on the proposed changes which runs until the 22nd January 2025. Details are available at: Technical consultation – Inheritance Tax on pensions: liability, reporting and payment – GOV.UK
  We will be issuing our response and you can too if you wish. Following this, there will be a further technical consultation on the draft legislation.
• This means it will be some time before the final details are known. We will of course provide details when they are available.

The current proposals are:

• • On death, the Personal Representative (PR) of the deceased’s estate must make contact with the pension scheme administrator (SA) for details of their fund value and intended beneficiary(ies).
  • The SA must reply within 2 months to confirm who the beneficiaries are and the amount of the deceased’s fund attributable to each.
  • Both funds in accumulation and income drawdown must be included.
  • The PR collates information from all pension sources and calculates whether Inheritance Tax is payable, then apportions the nil rate Inheritance Tax allowance across personal assets and pension schemes.
  • For example, if the pension scheme consists of 60% of the total estate it will be allocated 60% of the nil rate allowance e.g. 60% x £325,000 = £195,000 which is free from Inheritance Tax in the pension scheme.
  • The PR issues a statement to the SA of how much nil rate band is allocated to the pension scheme.
  • For example, if the pension scheme consists of 60% of the total estate it will be allocated 60% of the nil rate allowance e.g. 60% x £325,000 = £195,000 which is free from Inheritance Tax in the pension scheme.
  • The PR issues a statement to the SA of how much nil rate band is allocated to the pension scheme.
  • The SA must then calculate the Inheritance Tax due above the nil rate amount.
  • The Inheritance Tax must be paid by the pension scheme within 6 months after the end of the month in which the member died. Late payment will accrue interest.
  • The SA is solely liable for the Inheritance Tax until 12 months have passed. There is then a joint liability with the beneficiary(ies).
  • The SA could not pay-out any death benefits until the pension scheme’s Inheritance Tax liability has been calculated.
  • Where the deceased was over age 75, subsequent benefit withdrawals by beneficiaries will be subject to their marginal rate of income tax. This could involve a double tax liability where Inheritance Tax has already been paid.
  • Naturally the timescales are unrealistic and the administrative expectations of the PRs, pension scheme trustees and scheme administrator are unreasonable. There could also be liquidity issues for pension schemes holding illiquid investments such as property. We will cover these points in our consultation response.

• It may be of use before the new measures are introduced to consider updating members’ Expression of Wishes to nominate the spouse/civil partner rather than other family members. Before doing so, we recommend taking advice. Click the buttons below to access our Expression of Wishes forms for both SIPP and SSAS. Each year, we’ll continue to include a blank form with your anniversary pack, making it easy for you to update your beneficiaries.

• Lump sum death benefit payments to charities will be exempt from assessment for Inheritance Tax.
• There may be scope to mitigate or reduce potential Inheritance Tax liabilities by using strategies such as pension recycling, unallocated funds in SSASs, Death Benefit Trusts and pension life insurance to provide liquidity to pay Inheritance Tax. We can provide details nearer April 2027 should these prove to be useful.

These proposed new rules mark a return to the previous Labour Government’s principle of building-up pensions during your working life and drawing down during retirement. This would mean preserving other assets for your beneficiaries to inherit rather than pension savings. However, as said above, now is not the time to make any hasty decisions.

We will continue to monitor the situation as it develops.

This communication is based on our current understanding of tax rules announced in the 2024 Budget and may be subject to change.