Murray Beith Murray LLP is a leading Scottish private client law firm.
For 175 years we have specialised in meeting the legal, financial and administrative needs of individuals and families, family trusts, charities and private companies.
Murray Beith Murray LLP is a leading Scottish private client law firm.
For 175 years we have specialised in meeting the legal, financial and administrative needs of individuals and families, family trusts, charities and private companies.
Private Client Partner Alec Stewart, explains why now might be the time to reassess your estate planning in The Scotsman today. Read the full article below, republished by kind permission of The Scotsman:
The October 2024 Budget saw Chancellor Rachel Reeves unveil what she called the “biggest pension reform in decades.” Marketed as a plan to boost economic growth, many see it as a way to tax their life savings.
Currently, pensions offer a significant inheritance tax (IHT) advantage. Withdrawals during your lifetime are subject to income tax - potentially up to 48 per cent – but with careful planning, you can manage this liability by drawing smaller sums to avoid higher tax brackets.
Crucially, pensions are not currently deemed to be part of your estate on death, meaning that they escape the 40 per cent IHT charge. In recent years, this has made pensions a powerful estate planning tool. Many retirees have opted to draw down other assets first, preserving their pensions as a tax-free legacy for their families.
Under current rules, if you die before 75, your unused pension can be passed on completely tax-free. If you die after 75, beneficiaries pay income tax at their marginal rate on withdrawals but still avoid IHT. This has allowed pensions to function much like trusts or whole-of-life policies, as tools for wealth preservation rather than simply retirement income. So much so, pension funds are sometimes never accessed during retirement, demonstrating their evolving role in estate and tax planning rather than their intended purposes as an income supply.
That is all set to change. From 6 April 2027, unused pension funds and death benefits will be included in your estate and subject to IHT, unless left to a UK-domiciled spouse or civil partner. This shift could push many estates over the nil-rate band, creating unexpected tax burdens for families. Concerns have also been raised about potential delays, increased costs, and administrative burdens for beneficiaries.
The full details will emerge following the ongoing government consultation, but there are steps to consider now:
Take the 25 per cent tax-free lump sum. If you have not done so already, withdrawing this portion could provide flexibility. Once withdrawn, you can spend, gift, or purchase an annuity (although annuity income will be subject to income tax at your marginal rate).
Gifting from your pension. Drawing down and gifting pension funds will incur an income tax charge, but this could be offset by careful planning. Be mindful of exceeding income tax thresholds and consider term assurance to cover the seven-year period of a potentially exempt transfer (PET).
Revisiting nominations. If leaving your pension to a spouse or civil partner, you may not need to make immediate changes. However, nominating children or other beneficiaries sooner could allow them to benefit before the tax rules shift in 2027.
While no immediate action is necessarily required, this two-year window presents an important opportunity to reassess your estate planning, and it would be sensible to keep abreast of the situation as the government reacts to the consultation process. Pensions have long been a cornerstone of tax-efficient wealth transfer and may remain an efficient way of saving for retirement compared with other tax wrappers, but with these changes looming, it would be prudent to seek advice and if appropriate explore alternative strategies to protect your legacy.
Murray Beith Murray LLP Partner, Alec Stewart is an expert in succession, inheritance, and tax planning, and he is a dual qualified solicitor (Scotland and England/Wales). He is also authorised to provide financial advice.
If this article has raised any questions or you would like to discuss your affairs then please call us on 0131 225 1200 or complete our enquiry form.
Murray Beith Murray LLP was established in 1849, as advisors for generations of clients, committed to our values of integrity, expertise and trust. This aim and these values continue to this day, as does our commitment to be here when you need us.
