If clients decide to withdraw ‘excess’ funds from their pension pot, they will pay income tax on the withdrawal. They can then move it out of their estate to children or others by using the usual IHT gift exemptions – including annual gifts and the normal income out of expenditure tax rules.
Any money they gift outside these rules could still be caught by the seven-year rule.
Other alternatives to reduce any IHT bill could be to move the pension money into investment bonds held under trusts, although that needs careful consideration.
Advisers and their clients now have a period to figure out what the changes may mean for long-term retirement income and estate planning. But before they rush in, remember the change does not happen for the next two and a half years, and there are many questions to be answered between now and then.
In the meantime, pensions remain extremely tax efficient on death.
Rachel Vahey is head of public policy at AJ Bell
