Autumn Budget 2024 - Pensions Aspects

The Chancellor of the Exchequer, Rachel Reeves, delivered her first Budget Statement on 30 October 2024. There were aspects within that Budget which impact pensions.

What did not happen?

Firstly, though, it’s important to address the significant pre-Budget speculation which surrounded the possibility of tax-free pension commencement lump sums (PCLS) being limited to, for example, £100,000. As you may already be aware, this was not mentioned in the Budget Statement, nor in any supporting documentation which was published by the Government immediately after the Statement was delivered. Therefore, there has been no change to the amount of tax-free lump sums scheme members can take within their lifetimes.

There was also speculation that tax relief on pension contributions might be changed. That has not happened either.

What did happen?

There was, however, a major announcement regarding the taxation of pension scheme death benefits i.e. benefits paid from Registered Pension Schemes to a member’s beneficiaries when the member dies. This change is to be effective from 6 April 2027.

What is the change?

The Chancellor announced that almost all types of pension scheme death benefits will come within the scope of Inheritance Tax (IHT) with effect from 6 April 2027. This is regardless of whether the scheme member died before, on, or after their 75th birthday.

This is a significant change from the current position whereby the value of pension scheme death benefits is generally excluded from the value of a deceased member’s estate when they die, regardless of the age at which they die.

From 6 April 2027, the value of the deceased member’s pension scheme death benefits will be added to the other assets of the person’s estate and, if the combined value of these takes the value of the estate above certain thresholds (after allowing for any exemptions which apply), then IHT will become payable. The IHT liability attaching to the pension scheme will need to be met by the pension scheme rather than from other assets of the estate and vice-versa.

However, it is crucial to note that certain pension scheme death benefit payments will not be affected by this change. For example, death benefits paid to a spouse or civil partner, will benefit from the same type of exemptions which apply to the deceased’s wider estate and will not be subject to IHT in relation to the pension scheme death benefits.

Is this set in stone now?

Immediately following the Budget Statement, HMRC launched a Consultation on the detailed mechanics of implementing the changes – including how and when pension scheme administrators / trustees communicate with the deceased’s Legal Personal Representatives (the people dealing with the deceased’s estate). This Consultation runs until 22 January 2025.

It is important to stress that the Consultation paper does not seek views on whether or not the changes should happen; it is worded on the basis that the changes are actually happening and that it’s merely the mechanics which need to be addressed prior to legislation being drafted.

What are the implications for SIPP and SSAS members?

Firstly, IHT is a very complex area of financial planning and we would always suggest that scheme members seek professional advice regarding estate planning. Dentons Pensions’ staff cannot provide advice on this, nor can they do so on other financial planning matters.

Secondly, please bear in mind that the changes are only effective from 6 April 2027 according to the Budget Statement and supporting documents. Any death benefits payable prior to then will be subject to the current rules. 

Thirdly, please also bear in mind that payments of pension scheme death benefits to a spouse or civil partner are exempt from IHT under the new proposals.

What if there is no liquidity within my pension scheme with which to pay an IHT bill at the time it’s due?

Given the nature of some types of investment within SIPP and SSAS arrangements (such as commercial properties, loans, unquoted shares and so on), it could be the case that an unexpected death could result in there being no liquid cash (or investments which can easily be sold to create cash) with which to settle any IHT bill immediately. 

There may be various options which could apply, depending on your individual circumstances and you should seek professional advice if you are unsure. As an example, it might be possible for the pension scheme to borrow funds in order to settle an IHT bill. Dentons allows pension schemes to borrow from a connected party (on demonstrably commercial terms) or from commercial lenders. Alternatively, it may be possible to sell some illiquid assets within the timescale by which IHT needs to be physically paid. Further alternatives might develop between now and the implementation date and your regulated financial adviser might be able to keep you informed of any developments in this area.

Is this bad news overall for SIPP and SSAS pensions?

Whilst it may seem to be a major and unexpected change in the pensions landscape, it’s important to keep in mind the other significant advantages which apply to Registered Pension Schemes, including –

• Tax relief on Employer/Member pension contributions within HMRC’s limits
• Income from scheme investments is generally received tax-free
• There is no Capital Gains Tax due on disposal of scheme investments (including commercial property)
• The option to take a tax-free PCLS payment in your lifetime
• The pension scheme remains a legally separate entity from you/your business

What comes next?

We will continue to provide you with updates as and when we have more detailed information on the results of the Consultation and any resulting draft legislation. In the meantime, please speak to your professional adviser(s) if you have any questions relating to IHT.