It’s a shame to admit it, but fear is clearly driving demand for Financial Planning advice in some quarters.
This fear is one of tax and in particular Inheritance Tax, which will be applied to pensions from April 2027 unless the Chancellor has a rethink.
Some 90% of Financial Planners have reported a jump in demand for advice specifically related to the IHT threat to pensions since Ms Reeves announced her plans in October.
It’s worth recapping the risk. At present pension ‘estates’ are tax free when the owner dies. This means that unused pension funds can be passed on without tax, in the main, to family members and others. There are, as always, caveats but most pension funds can be passed on without risk of IHT. It's a substantial benefit to taxpayers, particularly those with substantial pension funds.
From April 2027 this exemption will no longer apply and a painful 40% IHT will be levied. This could generate serious funds for the Treasury, particularly in London and the South East, but it is spooking clients.
According to a survey of 100 financial advisers by investment manager Downing, more than nine in 10 Financial Planners (94%) have reported a rise in demand for IHT planning advice since the October Budget when Ms Reeves made her bombshell announcement.
Interestingly, two in five advisers and wealth managers said enquiries were mainly coming from new clients, with 17% seeing enquiries mainly from existing clients and 39% reporting a mix. Some 85% of advisers said they expected a fifth or more of their business to be driven by IHT advice within three years, an astonishing figure.
To provide some scale to the issue, the Office for Budget Responsibility has forecast that close to 10% of all estates will pay IHT by 2030. Many hard working people who had expected what was left of their pension to go to their family will find the Treasury taking a large chunk instead.
Inheritance tax receipts have, of course, been rising rapidly and raised £7.6bn for the Treasury in the 2023/24 tax year. Receipts are forecast to continue to rise as fiscal drag pulls more estates into the IHT net with the nil-rate band and residence nil-rate band frozen until 2030.
Financial Planners are ideally placed to advise on this area but Downing’s research found that concerns about the cost of IHT advice was often deterring clients from seeking help. It is, of course, a complex area and advice needs to be carefully constructed so it will not be cheap.
Inevitably planners are already finding IHT mitigation solutions for clients with 64% using trusts, 63% gifting from income, 34% gifting lump sums, and 12% using business relief plans. The pensions and IHT fightback has begun.
I can fully understand Ms Reeves wanting to raise more money, and taxing the estates of the deceased is one way to do this, but these will often as not be hard-working professionals and business people whose estates would already be facing IHT on the non-pensions element. Increasing that IHT burden even further by making pensions less tax efficient does not seem a sensible balance to me.
It’s not too late to review the policy and at least taper some of the impact. If not, we will find many thousands of people doing their level best to run down their pensions to zero to escape the clutches of the taxman. The Treasury may find its moves raises far less than expected.
• PureProfile surveyed 100 UK financial advisers and wealth managers on behalf of Downing in November.
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Kevin O’Donnell is editor of Financial Planning Today and a journalist with 40 years of experience in finance, business and mainstream news. This topical comment on the Financial Planning news appears most weeks, usually on Fridays but occasionally other days. Email: This email address is being protected from spambots. You need JavaScript enabled to view it. Follow @FPT_Kevin
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