Reeves' Revenge on Pensioners

How SIPP Rule Changes Will Affect Your Retirement and Estate Planning

Rachel Reeves has fundamentally altered the landscape for retirement planning.

In a surprising move, the Autumn Budget 2024 introduced by Chancellor Rachel Reeves has fundamentally altered the landscape for retirement planning. One of the most contentious changes is the decision to make unspent defined contribution pensions (like Self-Invested Personal Pensions or SIPPs) subject to inheritance tax (IHT) from April 2027. This shift, reversing a policy introduced by George Osborne in 2015, has been met with criticism from financial experts and families alike.

What is Changing?

Previously, SIPPs were considered outside of your estate, meaning they were exempt from IHT. If you inherited from someone who was over 75, you'd only pay income tax at your own marginal rate on any withdrawals from the fund. This made pensions an attractive way to pass wealth to the next generation. However, under the new rules, any unspent SIPP funds will be treated as part of your estate upon death, subject to the standard 40% IHT if the total estate value exceeds the nil-rate band. The nil-rate bands have also been frozen at £325,000 per person, plus the residential nil-rate band of £175,000 until 2030. This means a couple could potentially pass on £1 million without any tax to pay. But remember, the residential nil-rate band is tapered away for estates over £2 million, and including any unspent SIPP values in this calculation will mean that many more estates are affected.

The government justifies the move as a step toward preventing pensions from being used primarily as an inheritance tax planning tool. However, critics argue that it will discourage saving for retirement and effectively impose double taxation on private pensions.

Case Study: The Real-Life Impact

Profile:

• Name: David Miller (Widower)

• Age: 68

• Occupation: Retired Engineer

• SIPP Value: £900,000

• Other Assets: £1 million (property), £500,000 (investments)

David's estate currently stands at £2.4 million, under the current rules his SIPP is excluded for IHT purposes, leaving £1.5m. His total available nil rate band is £1m, so only £500k would be subject to IHT at 40%, totalling c.£200k.

Under the new proposal, from April 2027, his SIPP will be included in his estate, which will now total £2.4m for IHT purposes. The residential nil-rate band is reduced by £1 for every £2 the estate is above £2m, so the total nil-rate band available reduces from £1m to £800k. Therefore, £1.6m will now be subject to IHT at 40%, meaning the total IHT bill will be c.£640k (an increase of £440k or a tax on his SIPP of c.49%).

Case study showing the real life impact of including pensions inside your estate for inheritance tax purposes

Strategic Considerations

1. Reassess Your Withdrawal Plans:

To reduce your tax exposure, you might consider drawing down your pension

savings earlier than planned and reallocating to tax-efficient investments like

ISAs.

2. Update Your Estate Planning:

Review your will to reflect the new tax treatment and incorporate other

tax-efficient strategies, such as gifting out of surplus income.

3. Look at Other Options:

Think about wealth preservation strategies, including trusts, life insurance, or

tax-advantaged investments such as enterprise investment schemes (depending

on your risk appetite).

Conclusion

The decision to include unspent SIPPs within IHT liability marks a major shift in how pensions are treated in estate planning. With the 2027 implementation date approaching, it’s crucial to get professional advice, rethink your retirement strategy, and ensure your plans are aligned with your goals and the new tax landscape.

At Wealth Differently, we’re here to help you navigate these changes. We’ll work with you to build a tailored plan that protects your wealth and supports your financial future. Get in touch to find out how we can help.