Millions of individuals over the age of 55 in the UK are planning to gift over £8 billion to younger relatives before April 2027, in an effort to avoid inheritance tax on their unused pension savings. This surge in gifting is prompted by a government policy change set to include unspent pensions in inheritance tax assessments starting in April 2027.
The inheritance tax, which is levied at 40% on estates exceeding certain thresholds, currently excludes unspent pension funds. However, the upcoming policy, announced by former Chancellor Rachel Reeves, aims to bring these assets into the tax calculation.
A survey conducted by Interactive Investor, which polled 5,000 individuals, revealed that 1,884 respondents were over 55. Of these, a significant number plan to transfer wealth. The median gift among this age group was reported as £3,000, an amount equivalent to the annual gift allowance free from inheritance tax. For those over 65, this median gift amount increased to over £5,000.
Based on official population data, Interactive Investor estimates that nearly 2.8 million individuals over 55 intend to make gifts before the new tax regime takes effect. This collective action is projected to result in approximately £8.3 billion being transferred.
The research also indicated a heightened sense of urgency among older individuals, with the number of over-65s planning to gift nearly double that of individuals aged 56 to 65. Motivations for these gifts varied, with 37% citing the avoidance of future tax as their primary reason. Other significant factors included a desire to help family members financially (41%) and to see loved ones benefit from the money during their lifetime (48%).
Craig Rickman, a personal finance expert at Interactive Investor, commented on the situation, stating, "The end of the current tax year is shaping up to be something of a cliff edge for retirement savers. Pensions have traditionally been one of the most tax-efficient ways to pass on wealth, but bringing unused savings into the inheritance tax net is prompting many to rethink their estate planning strategy."
He also advised caution, emphasizing that pensions retain significant tax advantages, particularly regarding upfront benefits, and will continue to be a central component of retirement planning. He recommended maximizing the use of other tax-efficient vehicles, such as ISAs, for greater flexibility.
Individuals looking to mitigate inheritance tax on their pensions can explore several strategies. One is to spend down their pension pots, keeping in mind income tax thresholds for withdrawals. Another is to gift assets to loved ones, with gifts of £3,000 per year and small gifts up to £250 being exempt from inheritance tax. Gifts made from spare income are also exempt, provided they are regular. It is also advised to leave clear records of pension holdings with your will to assist beneficiaries.
Another strategy involves modifying one's will. For instance, directing pension assets to a surviving spouse, rather than directly to children, could delay and potentially reduce the overall inheritance tax liability, as the spouse would have more time to spend or gift the remaining funds.