Chancellor’s pensions reform has created ‘unlimited shelter’ from IHT

The Chancellor has created an “unlimited inheritance tax (IHT) shelter” as a result of his move to abolish the pensions lifetime allowance in yesterday’s Budget.

As reported by our sister title, MoneyAge, Jeremy Hunt’s changes mean that from April, couples could shelter up to £120,000 a year from IHT depending on their earnings, by contributing to a pension.

Analysis by NFU Mutual showed that if an individual was to put £60,000 into a pension from 6 April, and then a further £60,000 into their pension for each of the next 10 years, they could build up a pot of £812,298, assuming 4 per cent growth after charges compounding monthly. This would normally be free from IHT, providing an IHT saving of up to £324,919.

If two people were able to invest in their pension that way, they would have a total of £1.62m to leave free from IHT, giving them a saving up to £649,838.

“Pensions are normally exempt from IHT and are increasingly being used to hand money down to the next generation in a tax-efficient way,” said NFU Mutual chartered financial planner, Sean McCann.

“By abolishing the pension lifetime allowance, the Chancellor has created an unlimited IHT shelter for families.

“The only restrictions in place are the annual allowance and your earnings. The annual allowance is increasing to £60,000 in April for those who have not taken a taxable payment from their pensions.

“You will be able to invest up to the level of your earnings, capped at £60,000 per tax year. This means couples will be able to shelter up to £120,000 a year from IHT, provided they both earn £60,000 or more.”

This comes as the Office for Budget Responsibility (OBR) yesterday revised its projections for the Treasury’s IHT intake over the next six years. The Treasury is now forecast to take in £45bn in IHT receipts for the period between 2022/23 and 2027/28 – a total up £2.9bn compared to the OBR’s estimates in its November statement.

“The OBR still expects IHT receipts to rise in the next few years, but this change to pensions will limit the increase,” McCann added.

“We will see more and more people using pensions for IHT planning and in retirement, taking money from ISAs and other investments which are subject to inheritance tax before accessing their pensions.”

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