Protecting Your Pension From Inheritance Tax
We provide bespoke financial advice.
This article considers strategies to protect your wealth, and is intended for British expats.
Understanding Inheritance Tax on Pensions
Historically, pensions have been one of the most tax-efficient ways to pass on wealth, as many pension funds could be inherited free of IHT. However, changes announced in the Autumn Budget 2024 mean that from 6 April 2027, most unused pension funds and death benefits will be included within an individual’s estate for IHT purposes. This shift makes it essential to review and plan how best to protect pension savings from unnecessary taxation.
IHT Planning | QROPS Qualifying Recognised Overseas Pensions Scheme
A QROPS (Qualifying Recognised Overseas Pension Scheme) can be used in estate planning to help mitigate Inheritance Tax (IHT). As the scheme is held outside the UK, the funds remain outside the individual's estate for IHT purposes. However, also included in the Autumn Budget 2024 was the removal of the Overseas Transfer Charge exemption for EEA countries and Gibraltar.
As a result, retired expatriates in Spain, France, Portugal, Cyprus, and all EEA countries now face a 25% charge on overseas transfers due to the lack of suitable QROPS in these locations. However, residents of Malta and Gibraltar can still access local QROPS and remain exempt from this charge.
Strategies To Protect Your Pension From IHT
Utilise Spouse Exemptions
Passing pension benefits to a spouse or civil partner may still be more tax-efficient, as these transfers are usually exempt from IHT. However, it’s essential to check how this fits into your overall estate planning strategy.
Consider Using Your Pension Pot First
Pensions have traditionally been seen as a wealth transfer tool because they were largely exempt from IHT. However, with the new rules, it may be more tax-efficient to drawdown down pension funds during retirement rather than other assets that might still benefit from favourable tax treatment.
If you have a defined contribution pension, including personal pensions, workplace pensions and SIPPs (Self Invested Personal Pensions), and are over 55, under the Pension Freedoms Act, you can draw from your pension pot.
Whilst we would always recommend against accessing your pension early, as any pension income taken today is taken from your future provisions, depending on how and where your other assets are held and invested, it may be a prudent option.
Utilising Offshore Investment Accounts
In certain jurisdictions, by transitioning your pension pots into locally compliant, or offshore investment accounts, you can remove your assets from the scope of HMRC.
The options available will depend on your country of residence, as well as how long you have been fiscally resident outside of the UK.
Tax-Free Cash and NT Tax Code
If you have not taken pension withdrawals, you can access pension tax-free cash of 25%. Note, whilst tax free in the UK, most other countries will apply income tax and or social charges.
Depending on your country of residence and subject to a double taxation agreement being in place with the UK, you can access your unspent pension funds free of UK tax. By obtaining an NT code, all pension income can be taken without paying income tax in the UK. As with the tax-free cash, income tax, as well as potential social charges, may be due in your country of residence.
It's important to factor in any other taxable earnings that may fall into the tax year.
Drawing down the income over a number of years is likely to be the most tax efficient way of taking your pension savings.
Pension Options | Access My Pension
Flexible Income Drawdown (also known as flexi-access drawdown) is a way of accessing your pension pot while keeping it invested, allowing you to take as much or as little income as you need. It provides greater control over retirement funds compared to traditional annuities or encashing the full pension pot.
Most contemporary (post-2018) pension plans will allow flexi access drawdown. If your scheme does not, you will need to transfer to an International SIPP in order to gain flexible drawdown options.
UK Expat IHT Planning
With upcoming changes to how pensions are treated for IHT, proactive estate planning is more important than ever. Reviewing your pension arrangements, making informed decisions about withdrawals and beneficiaries, and exploring tax-efficient strategies can help protect your wealth for future generations. Taking action now ensures that you make the most of your pension while minimising potential IHT liabilities.
Expat Pension Specialist | The Wealth Genesis
At The Wealth Genesis, we specialise in helping British expats worldwide navigate their financial planning needs.
As a fully independent and regulated firm, we have no ties to specific providers or investment managers. This independence enables us to offer tailored financial solutions designed to align with your unique circumstances and goals.
We are committed to transparency, providing clear and fair pricing with no hidden fees.
