The 2024 Autumn Budget saw the Chancellor, Rachel Reeves, confirm that from 2027, unused pension pots will be classified as part of an individual’s estate.
Nearly ten months on from that budget, over £18 billion has been withdrawn from pension pots.
A sharp 60 per cent increase from the £11.25 billion withdrawn in the previous 12 months as individuals act to protect their estate.
The fear of an Inheritance Tax (IHT) bill has forced the hand of many individuals as they withdraw tax-free cash sums.
The 2024 Autumn Budget has clearly prompted individuals to take action to ensure their estate won’t be liable in the future for an IHT bill.
The statistics would back that up, as in the six months up to and including March 2025, £10.43 billion was withdrawn, a 36.5 per cent increase on the six months before last year’s Autumn Budget.
Alongside the increase in cash sums, the number of individuals withdrawing also rose by a staggering 33 per cent.
During last year’s Autumn Budget, Rachel Reeves announced the IHT nil-rate band would remain frozen at £325,000 until 2030, and that unused pensions to be classed as part of an individual’s estate from 2027.
These IHT announcements have, unsurprisingly, prompted individuals to act, and this figure could rise still ahead of this year’s Autumn Budget taking place on 26 November.
The Chancellor’s plans are shrouded in mystery, but we know she must kickstart the economy and balance the Government’s books, which means she will either raise taxes or cut spending.
Given her own tight fiscal rules around taxes, she may explore other reforms to IHT in a bid to improve the overall economic picture.
Before withdrawing cash sums from your pension pot, you need to consider if it’s the right approach to take.
In the short term, it will help combat IHT concerns as withdrawing a cash sum from your pension pot will reduce the value of your estate.
Currently, most savers can take 25 per cent of their pension pot when they turn 55, withdrawing up to £268,275 tax-free. giving individuals the opportunity to withdraw cash sums in a bid to protect their estate and manage rising costs.
It also gives you the opportunity to give beneficiaries their inheritance early. However, this could be subject to the seven-year gift rule, in which the cash sum could be liable for a tax bill from HM Revenue and Customs (HMRC) if you pass away during those seven years.
In addition to this, withdrawing a share of your pension pot decreases its value and gives you much less to live on long-term.
There is also the small matter of where to put your cash sum once withdrawn. Placing it in a savings account brings its own tax risks, and an Individual Savings Account (ISA) limits you to a maximum sum of £20,000.
You’ve got to be sure that withdrawing from your pension pot is the right decision because there are positives, but there are also challenges that come with it, and you must be sure before making any decisions.
IHT is something many pensioners and savers will want to avoid, and withdrawing from their pension pot is a viable option to combat this.
However, before making any decisions, speak with finance experts. They will listen to your situation and offer you tailored advice and support to ensure you can make the right decision.
They will recommend the best steps to take and help you understand your overall financial position to make the right decision for you and your estate.
Contact our team today for expert advice and support on all tax matters.
