Nothing is certain except death and taxes, and now the Budget has “put up death taxes too”, according to Charlene Young, pensions and savings expert at AJ Bell.
Unspent pension funds will form part of people’s estate from April 2027 onwards, ending pension funds’ previous immunity to inheritance tax (IHT).
This change has the potential to transform how people invest and manage their pension funds, as well as how they pass on money to the next generation.
Alex Cummings, a wealth planner at Succession Wealth, said his clients had been “using alternative assets to fund retirement spending, with pensions being used for passing on wealth”, but that approach “could be turned on its head”.
“I can see trust-based whole-of-life and gifting strategies becoming a bigger focus going forward,” he added.
His colleague Hayley Burns, also a wealth planner, advised people to discuss succession planning with their families and to consider gifting money earlier.
“From a long-term care planning perspective, it may become more attractive to purchase long-term care annuities to remove funds from the estate”, she continued, “especially if that would mean keeping the estate within allowances”.
Everyone can pass on £325,000 before IHT is due but this amount has been static since 2009 and the chancellor has extended the freeze until 2030. The allowance is therefore shrinking in real terms (once inflation has been taken into account).
If any part of the £325,000 threshold is not used, the remaining allowance can be passed on to a surviving spouse or civil partner, potentially amounting to a £650,000 allowance per couple.
What’s more, unused pensions can still be transferred to a spouse or civil partner without incurring IHT, but pension money will be taxed if given to anyone else.
In light of this, Chris Flower, chartered financial planner at Quilter Financial Advisers, said “it is imperative to review and, if necessary, update any existing expressions of wishes to ensure your pension goes to the correct beneficiary”.
There are many other ways to save for the next generation other than pensions, said James Norton, head of retirement and investments at Vanguard Europe. He suggested using junior ISAs to invest up to £9,000 tax-free on behalf of a child under 18.
AIM-listed stocks were previously exempt from IHT and, for some people, were an integral part of intergenerational wealth planning, but that has changed too.
AIM stocks now have a 50% reprieve from IHT, which is better than the full removal many experts had feared, but this still means that AIM stocks will be subjected to a new 20% IHT levy.
Anthony Cross, head of Liontrust’s economic advantage team, encouraged investors to look at AIM on its own merits. “There remains a huge valuation opportunity and upside in investing in AIM – these companies are not valuable because of their tax treatment but because of their underlying fundamentals,” he said.
"With interest rates reducing, growth returning, a stable government and [the tax] question now resolved, we believe the headwinds that have been plaguing AIM have now turned into tailwinds.”
Oliver Bedford, fund manager at Hargreave Hale AIM VCT, was encouraged by the continuation of tax benefits for venture capital trusts (VCTs) and enterprise investment schemes (EIS).
“Whilst the past few months have been very difficult for AIM – and by extension, AIM VCTs – confirmation that the government remains committed to the VCT and EIS schemes through to 2035 and news that AIM investors can still benefit from business property relief, albeit at a lower level, demonstrates the government’s continued support for two important constituents of the AIM investor community,” he said.