MTTM Podcast Episode 509 – Pension IHT changes, How much do you need to retire & Credit file hack

Listen to Episode 509

In this week's show I explore the proposed changes to Inheritance Tax (IHT) on defined contribution pensions, set to begin in April 2027. I discuss strategies that could be used to mitigate the potential impact. Next, I take a look out how much money you'll need in retirement in order to achieve a minimum, moderate and comfortable lifestyle. Finally, we explain how you can use a 'Notice of Correction' to improve your chances of securing credit if you have any negative marks on your credit report.

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Episode 509 Podcast Summary

The looming IHT change set to impact pensions

Summary

In this section I discuss the proposed changes to how defined contribution pensions are treated for Inheritance Tax (IHT) from April 2027. Currently, these pensions are largely outside of your estate for IHT purposes. However, the new rules could see them become liable for IHT, creating a "double taxation trap" where beneficiaries could face an effective tax rate of up to 67%. I explore the details of the proposal, its potential impact on unmarried couples and the Residence Nil Rate Band and outlines financial planning strategies that people are already considering to mitigate their potential tax liability, such as spousal nominations and strategic gifting.

Key insights

• Major Change Coming: From 6th April 2027, unused defined contribution pension funds may be included in your estate for IHT purposes
• Double Taxation Risk: If you die after age 75, your pension could be subject to 40% IHT and then your beneficiary's marginal rate of income tax, potentially reducing a £100,000 pot to just £33,000 for a top-rate taxpayer
• Review Beneficiaries: Nominating a spouse or civil partner can defer the IHT bill due to the spousal exemption. Unmarried couples are disproportionately affected as they cannot use this
• Gifting Becomes Key: Strategies like using the 'normal expenditure out of income' exemption or making larger lifetime gifts (PETs) from other assets may become more attractive to reduce the size of your estate before the new rules apply
• Seek Advice: These are still proposals and could change. However, the potential impact highlights the importance of reviewing your pension and estate plan with a financial adviser

How much do you need to retire?

Summary

In this section I go through the latest updated figures from the Pensions and Lifetime Savings Association (PLSA) on how much annual income is needed for different standards of living in retirement. I break down the latest figures based on a Minimum, Moderate, and Comfortable retirement living standard for single individuals and couples. The figures provide a useful benchmark for retirement planning, illustrating the lifestyle you could afford at each level, from the basics of a week's holiday in the UK to the luxury of multiple foreign trips and a brand-new car every five years.

Key insights

• Minimum Retirement: A single person needs an annual income of £13,400 and a couple needs £21,600. This covers all essential needs plus a small amount for socialising, but does not include running a car
• Moderate Retirement: A single person needs £31,700 and a couple needs £43,900. This allows for more financial flexibility, including a two-week holiday and running a small second-hand car
• Comfortable Retirement: A single person needs £43,900 and a couple needs £60,600. This affords a more luxurious lifestyle with more choice, regular holidays abroad, and the ability to be more generous with gifts and home improvements
• It's a Benchmark: These figures are a guide to help you plan. Your personal retirement needs will depend on your own circumstances, such as your health, hobbies, and housing costs

Episode quiz 

1. What is the maximum effective tax rate a top-rate taxpayer might face on an inherited pension pot under the proposed new rules?
a) 40%
b) 45%
c) 55%
d) 67%

2. What is the name for a lifetime gift that becomes IHT-free if the person making the gift survives for more than seven years?
a) Potentially Exempt Transfer (PET)
b) Charitable Donation Exemption (CDE)
c) Annual Gift Allowance (AGA)
d) Normal Expenditure Transfer (NET)

3. To qualify for a reduced IHT rate of 36% on your estate, what percentage of your net estate must you leave to charity?
a) 5%
b) 10%
c) 15%
d) 20%

4. According to the latest PLSA figures, what is the annual income a single person needs for a 'Minimum' retirement?
a) £12,400
b) £12,570
c) £13,400
d) £14,400

5. What is the maximum word limit when making a 'Notice of Correction' statement?
a) 200 words
b) 500 words
c) 1,000 words
d) There is no word limit

Answers

1. d) 67%
2. a) Potentially Exempt Transfer (PET)
3. b) 10%
4. c) £13,400
5. a) 200 words

Resources

Links referred to in the podcast:

• IHT Gifting Exemptions (and how they work)
• Aberdeen Briefing Notes on IHT/Pensions
• How to find a good financial adviser you can trust
• Try out our free pension calculator
• Get a FREE pension review
• Subscribe to our Newsletter

 

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