The pensions and IHT changes coming in from 6 April next year, mean many families may need to review their estate planning strategy. This includes how they access assets, and in what order of priority, in retirement.
In the past, it often made sense to preserve pension assets and draw from other savings first in retirement. This was because pensions usually sat outside an estate for IHT purposes. But that logic has been turned on its head.
Claire Trott, Head of Advice at St. James’s Place (SJP), says now is a good time to look at the impact of the changes for your estate, reviewing other assets and options.
“Estate planning is about more than reducing tax. It’s about making sure your wealth is passed on in line with your wishes. Start with who and how you want people to benefit from your estate before you get down to the how am I going to protect it for them. It’s about making sure your wealth is passed on in line with your wishes, while balancing your own needs during retirement.
She adds: “The rates of tax in your lifetime, on death and your beneficiaries tax rates also need to feed into these considerations.”
Should I access ISAs or pensions first in retirement?
Whether you should draw on your ISAs or pension first will depend on your own personal circumstances. The right approach will take account of factors such as your income needs, tax position, estate planning objectives and the assets you want to leave behind.
Most pensions can be accessed from age 55, rising to 57 from April 2028. In some cases, taking money out of pension savings and making gifts during your lifetime can form part of an estate planning strategy. However, this will not be right for everyone, particularly if you rely on your pension to provide retirement income.
As Claire explains: “It is more difficult where there is a reliance on some or all the pension or investments for income in your lifetime.”
If reducing the value of your estate is a goal, there may be a range of options available, including gifting. However, different types of gifts are subject to different rules and tax considerations.
This is where ongoing financial advice can be particularly valuable. A holistic view of your finances can help you understand the potential impact of any decisions and identify the most appropriate strategy for your circumstances.
If you think your pension could push the value of your estate above the IHT nil rate band, or add to an existing liability, it’s worth taking time to understand the potential impact and the options available.
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Options to mitigate an IHT bill
Avoid making any rushed or knee-jerk decisions. Once you have a clear picture of your current position, you can check that your plans still reflect what you want to achieve in terms of passing on a legacy to loved ones.
Claire says: “This isn’t a one size fits all piece of advice. There will usually be a number of options.”
“Your circumstances now and in the future are important as well as the circumstances of your beneficiaries. You also never know when legislation might change again.”
Among the options to consider are various types of gifting and the use of trusts. An alternative is the use of whole of life insurance policies as a way of offsetting a potentially larger IHT bill.
Flexible retirement
The change to pensions and IHT is likely to lead some people to make different decisions about their retirement. Some may decide to retire earlier, accessing their pension to spend and enjoy for longer. Others may look to access pensions while continuing to work flexibly, as a way of reducing a sizeable pension pot.
Ongoing financial advice can be invaluable for retirement and estate planning, whether you’re looking to understand your position and future cashflow, explore your options or deal with more complex estate planning needs.
Trusts are not regulated by the Financial Conduct Authority.