THE changes in pensions in the budget really are a smack in the face with an old wet fish for financial planning.

Tabled as altering ‘loopholes’ they are pretty brutal in their measure in terms of bringing pensions under the scope of Inheritance Tax.

The changes do not come into effect until 2027, and there is only ‘hope’ they reconsider the actions during the consultation up to January 2025, as they stand to create significant excess work and confusion.

Moreover, those who used the current rules to plan are being penalised. They weren’t loopholes, they were rules and people abided by them.

Will they change? See ‘hope’ above.

That’s unlikely, given the consultation is about ‘views on implementation and processes required to bring the pension under the scope of inheritance tax’ rather than altering their plans for the tax.

So, you can say to ‘take it as read’, although the legislative detail required isn’t there to act on now, so be careful in acting too quick.

From 2027 pensions will be subject to the 40 per cent inheritance tax rate, and for beneficiaries inheriting from someone who dies after 75, income tax on withdrawals could apply.

The result? A potential double-tax whammy which could leave beneficiaries with as little as 33p for every £1 in the pension pot.

This policy, aimed at addressing perceived “abuses” of pensions for estate planning, might instead penalise ordinary savers who see pensions as a lifeline for their families.

The problems: A £100,000 pension could be slashed to £60,000 after inheritance tax.

Withdrawals from that remainder could then face a 45 per cent income tax for higher-rate taxpayers, leaving just £33,000. That’s an effective tax rate of 67 per cent.

READ MORE: Money Matters: Paying my mortgage off in retirement

Pension scheme administrators must now calculate and pay inheritance tax on death benefits before distributing funds to beneficiaries.

This requires coordination with executors to assess the deceased’s total estate, adding delays and red tape to an already emotional process. Really?

Including pensions in estates increases the risk of breaching the £2million threshold, where the residence nil-rate band (£175,000 per person) starts tapering away. Families could lose this vital allowance, pushing more estates into higher tax brackets.

While 2027 feels like a lifetime away, this window offers an opportunity to act decisively.

If you’re over 75 and keeping pension funds untouched for inheritance purposes, it might be time to rethink.

Drawing down funds and using them to make tax-free gifts could reduce your estate's size while benefiting loved ones now. Remember, gifts are exempt from inheritance tax if you survive seven years.

For those nearing retirement, consider taking the tax-free lump sum from your pension and investing or gifting it strategically. Doing so ensures this portion isn’t hit by both inheritance tax and income tax later.

A bypass trust allows you to pass pension benefits outside of an individual’s estate on subsequent deaths. While it won’t dodge inheritance tax on the first death post-2027, it ensures the funds aren’t taxed again in the beneficiary’s estate.

Update your death benefit nominations to ensure funds pass efficiently.

Leaving pensions to a spouse or civil partner remains inheritance tax-exempt, preserving value for the family. For other beneficiaries, weigh the benefits of binding nominations to avoid tax inefficiencies.

Shifting some savings to ISAs or other tax-efficient vehicles could help you spread the tax burden. While ISAs are subject to inheritance tax, they avoid the double hit of income tax on withdrawals.

Having multiple pensions complicates administration. Merging pots could streamline inheritance tax calculations and reduce delays for your beneficiaries.

These changes claim to close a “loophole,” but for many, they feel like a hammer where a scalpel was needed. The government estimates this will raise an extra £1.46billion a year by 2030 – at what cost or administrative cost?

Often sold as ‘it won’t affect many households’ then why are you doing it? For affected families, the costs will be more than financial - delays, stress, and reduced inheritances will take their toll.

To retain flexibility, many may simply insure against the tax, placing the benefit into trust to avoid probate, stress and delay.

If there’s a silver lining, it’s that there’s time to adapt. Seek advice from your independent financial adviser who understands these complexities.

If you have a financial question, please call 023 8064 9674 or email info@wwfp.net