
‘My children could pay up to 90pc on their inheritance. What can we do?'
Write to Pensions Doctor with your pension problem: pensionsdoctor@telegraph.co.uk. Columns are published weekly.
Dear Charlene,
I'm worried that with the upcoming changes to pensions, my children are going to potentially face 'double taxes' on what I leave to them. I've read about tax rates of 50pc, 60pc and even 90pc in some cases.
I'm 75 next month (my wife is already 75) and my two children are nominated to get one third each of my fund, with my share of the house and Isas to pass to my wife (and vice versa).
I've already taken the tax-free cash from my pensions which now stand at £800,000. Our Isas and cash savings are worth £400,000 between us and the house could potentially be worth £1m.
I'm weighing up taking more money out of my pensions even though we can comfortably live off our current income. Will this do anything to help or am I wrong about the high tax rates?
Kind regards,
– Roger
Dear Roger,
The proposals to bring pensions into inheritance tax (IHT) have led to this policy being described as a 'double whammy'.
The current income tax rules on inherited pensions revolve around the age of the pension holder. This is not due to change under the proposals.
Currently, if a pension holder dies before age 75, with a defined contribution scheme like a Sipp, no income tax will normally be paid by their beneficiaries on money they take from the pension.
If the pension holder was over 75 when they died, their beneficiaries pay income tax on any withdrawals.
This is why many people have described the new plans as being 'double tax', because some beneficiaries could see the pot reduced due to inheritance tax, and then income tax when they withdraw cash if the pension holder died age 75 or over.
A spousal exemption for IHT will still apply to any unused pension funds left to spouses or civil partners but anything left could form part of their estate on second death.
The combination of IHT, then income tax, means that anything that passes to your children could face a tax charge of up to 52pc if they are basic-rate taxpayers when they withdraw any inherited funds, 64pc if they are subject to higher tax rate and 67pc if they pay the additional rate of income tax.
Estates worth more than £2m
The 90pc rate is an extreme example – but relates to how 'nil-rate bands' for IHT are reduced in certain circumstances. Every estate gets a nil-rate band of £325,000 on which no IHT is payable.
If passing property to a direct descendant, then an additional 'residence nil-rate band' of up to £175,000 each is also available. Both of these allowances can be transferred between spouses, so it's common to hear that a married couple can leave up to £1m tax free between them before IHT applies.
Where an estate exceeds £2m the residence nil-rate band starts to be reduced at a rate of £1 for every £2 over the threshold, until it disappears for estates over £2,350,000.
The cumulative effect of the lost residence nil-rate band, plus the higher rates of income tax, could lead to an effective tax rate of 90pc for some large estates if unused pensions are also included for deaths after April 2027.
As I've mentioned before, it is difficult to weigh up options until we have more details on exactly how the rules will work.
People who are in their late 70s or 80s already understandably feel frustrated by the lack of detail, as they might feel they have less time to act compared to those in the early years of retirement.
Lots of people have considered simply spending more in retirement as a way of avoiding the tax man taking a share of their pensions under the new rules. For you, that will mean paying income tax on the extra money you draw from your Sipp. What rate of tax you'll pay depends on your other taxable income.
Others who feel they really don't need the money, or already have more than enough to last them through retirement and potential care costs, are considering making use of gifting rules and available exemptions in their lifetimes. I've covered how making gifts from income can end up funding pension contributions for younger family members – and even get them tax relief in this previous article.
What action is best for you will of course depend on your personal situation and is an area where advice could help you and your beneficiaries save money.
My suggestion would be to wait until we've got more information on the rules and then consider getting some professional advice about your estate planning, especially when it comes to reviewing your wills and considering gifts.
This could help avoid any costly mistakes and make a huge difference to the amount your loved ones can inherit.
With best wishes,
–Charlene
Charlene Young is a pensions and savings expert at online investment platform AJ Bell. Her columns should not be taken as advice or as a personal recommendation, but as a starting point for readers to undertake their own further research.

Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles


BBC News
38 minutes ago
- BBC News
Aberdeen rapid transit scheme costs could hit £323m
A proposed new tram-style bus system for Aberdeen could cost as much as £323m, according to a new is hoped Aberdeen Rapid Transit (ART) would run on two routes linking key destinations in and around the projected price of the project has more than doubled since initial investigations in 2021 - due to increased cost pressures, including a huge rise in construction on Aberdeen's net zero, environment and transport committee voted to move forward with engagement on the scheme and officers will report back on progress next year. It had been initially anticipated the project would cost £150m to implement. Now four options have been outlined by transport partnership Nestrans ranging from £167m to £323m. The lower cost option would require less new infrastructure, while the highest cost option would see the project in a fuller form including more construction and integrated cycling provision. Funding for the project remains unclear but sources such as a Scottish government transport scheme, local authority funding, and cash through the Aberdeen City Region Deal have been identified as options. The council said it was investigating where it could get the money from, including from the UK government. It is hoped ART could use tram-style vehicles which would travel along designated corridors, similar to Belfast's Glider buses. It is expected 36 of these electric vehicles would need to be purchased at an anticipated cost of about £ were raised during Tuesday's committee meeting about the value for money of the plans. Independent councillor Alex Nicoll said based on data in the report which suggested the scheme would bring in an extra 8,900 public transport users in the city, the project could cost more than £36,000 per extra passenger. He added: "We are speaking about £3.4m being committed by the council so far, without even a shovel in the ground. "We need to think about what we can actually deliver here, this council cannot afford it and it is that simple."However, project lead Kirsty Chalmers insisted bringing ART in would be good value for money. She said: "One of the reasons we are looking into this is the better value of it, instead of implementing light rail for example. "The ART project covers a number of regionally-important destinations and it is about creating choice and it is about it integrating with the bus and rail networks as well."


The Sun
38 minutes ago
- The Sun
Everything you can expect in Rachel Reeves' spending review – from Winter Fuel for 9million to massive defence boost
RACHEL Reeves will tomorrow unleash a spending bonanza of more than £100billion as she seeks to get her shaky Chancellorship back on track. The long-awaited package will see eye-watering sums of cash poured into shiny new projects like transport, energy and cutting-edge tech in a bid to drive growth. 1 But it will also set day-to-day departmental budgets for the next four years - giving extra funding to some while putting the squeeze on others. Weeks of haggling have seen Ms Reeves lock horns with Cabinet colleagues over how much of the pie they will get. Tomorrow at 12.30 the Chancellor will reveal to MPs who are winners - and who are the losers. Winter fuel Ms Reeves has already announced a humiliating u-turn on winter fuel payments and will restore the £200-£300 sum to nine million pensioners. She revealed the screeching retreat - that will cost £1.25billion - ahead of tomorrow's Spending Review. But the about-term came without details of how it would be paid for, with the Chancellor only pledging not to plug the hole with more borrowing. Critics have warned this could see taxpayers pick up the bill with a fresh raid at the next Budget in the autumn. Free school meals Children whose parents receive universal credit will be able to claim free school meals from September 2026 helping more than 500,000 pupils. But teachers will find that their school budgets will be tightened as schools will have to fund about a quarter of their 4 per cent pay rises themselves. Schools will be on the hook for around £400 million to stump up for the hikes as department money won't cover the rise. Police One of the thorniest issues has been the funding settlement for the police, sparking a behind-the-scenes row with Home Secretary Yvette Cooper. Top cops have been demanding more money to fight crime and monitor the increasing number of prisoners freed early. It has seen Ms Cooper locked in furious talks with the Chancellor that went right down to the wire and only resolved on Monday night. The Sun understands that she has secured a real-terms increase for the police, however tomorrow we will discover the extent of that hike - and whether senior officers are happy. Trams and buses A £15 billion pot for funding local transport links in the north of England and the Midlands has so far been set out. Trams will be at the heart of the cash boost with investment into the systems in Greater Manchester. New bus stations will be built in Bradford and Wakefield. London Mayor Sadiq Khan is already said to be furious that the capital will miss out on big spending projects to improve transport links. Defence Defence Secretary John Healey is set to be one of the big winners from the Spending Review - having been promised 2.5 per cent of GDP by 2027. The MoD budget will also rise to 3 per cent at some point after the next election, with the ambition to hit the target by 2034. It will be paid for by slashing the spending on overseas aid. But Ms Reeves is under pressure to go even further on defence spending, with both Donald Trump and NATO boss Mark Rutte pushing for 5 per cent of GDP. NHS boost The NHS will be a big winner with £30 billion rise in its day-to-day spending. Health Secretary Wes Streeting is understood to have initially asked for a 4 per cent hike but will settle for 2.8 per cent. But infrastructure spending in the health service will remain flat despite NHS managers demanding better buildings and improved IT systems. Nuclear The Sizewell C nuclear plant will be given the green light in a £14 billion investment - the first to get the go-ahead in thirty years. Ten thousand jobs and 1,500 apprentices will help construct the Suffolk site but it won't come on stream for at least another decade. Several small reactors known as 'mini-nukes' will be built with the government backing the first one with a design by Rolls-Royce. Housing Housing Secretary Angela Rayner has been arguing for much more cash to build more social homes. She only settled with the Treasury over the weekend after playing hardball for a bigger funding. Ms Rayner is also trying to secure more funding for local authorities tasked with building 1.5million more homes by 2030.


Telegraph
39 minutes ago
- Telegraph
‘I only earn £300 a month. How will I ever save?'
Receive personalised tips on how to improve your financial situation, for free. Here's how to apply or fill in the form below. For the past seven years, Jess Muxlowe has been learning to live with a brain tumour. Now, at 25, she's found a lifestyle that suits her, allowing her to quit her job and spend more time with her two-year-old daughter Freya. After studying theology and philosophy at Birmingham Newman University, Muxlowe worked as an administrator for her local council for a year before realising that a nine-to-five schedule did not suit her medical needs. A self-confessed bookworm, Muxlowe has instead managed to incorporate her love of reading into earning money. She sells books online, at events, through her local community, and in schools for Usborne Community Partnership, earning £300 a month. Usborne Community Partnerships is part of the publishing company of the same name, and allows people to work for themselves selling books. Muxlowe has sold 23,000 in just five months, and is aiming for 50,000 by the end of the year. Becoming self-employed and reducing her hours means she can attend medical appointments, even if they come through at short notice after being stuck on a waiting list for months. Her partner, Lee Bond, is the breadwinner. He works as a forklift truck driver and earns around £1,400 a month. Bond's wages cover household bills and Muxlowe's the food shop. She considers herself thrifty and is careful with day-to-day spending. She bulk buys food and freezes future meals, as well as using Facebook marketplace and Vinted to buy furniture and clothing. But when it comes to financial planning, Muxlowe isn't sure where to start. She doesn't know if she saved into a pension when employed by the council. Meanwhile, taking a significant pay cut, having earned £1,200 a month at the council, and the expenses of raising a child mean any savings have been depleted. Fortunately, the family of three lives in Muxlowe's mother-in-law's home, in Walsall, rent-free. Bond's mother works two jobs and moved out of the property so that the young family could live there. She rents a property with her partner instead. Long-term, Muxlowe hopes they will be able to get a mortgage and buy the property they're living in. But with such a reduced income stream, she wants to know how to prioritise her finances, and whether they should start contributing to a rainy day fund, saving for a mortgage, or building a retirement pot first. Will Stevens, head of wealth planning at Killik & Co Saving in your 20s can be a daunting task, including knowing whether to prioritise planning for retirement or focus on more immediate needs, such as saving for a home. This can be even more difficult when earnings are commission linked or you're working part-time. One thing that can help is having a budget that allows you to plan and understand where your savings should be prioritised. First and foremost, Muxlowe should prioritise a rainy day fund, making sure she has three to six months of expenditure set aside in cash, saved in the bank or in an instant access savings account for emergencies. While more immediate costs might need to come first, it's also important to strike a balance with saving for retirement, where early contributions can benefit from long-term compounding. By breaking down the timeline between her immediate, near future and long-term needs, she can begin to understand how much is needed towards each objective. Fortunately, there is also an option that can help with both: the lifetime Isa. The lifetime Isa has an allowance of £4,000 per year, which is part of your whole year Isa allowance of £20,000, and the Government then contributes 25pc on top. The Lifetime Isa must be used for your first home purchase – and there are restrictions, including a value limit of £450,000 – or it can be used to fund your retirement. If you make withdrawals for any other reason, you could lose the government contribution. Equally, a conventional Isa and pension combination will also work effectively to save towards both, but getting the balance right between the two can be difficult. It's important to note that she should take less risk with her money where it's needed for near-future costs, and she can take more risk and focus on equities for longer-term objectives like retirement planning to deliver real returns over the years. Nicola Crosbie, director at Moran Wealth Management, a St. James's Place partner practice Muxlowe's initial focus should be concentrated around building up her cash reserves to cover any emergencies or short-term needs, and savings for a house deposit. I would start by looking at the income the household generates and their fixed and discretionary outgoings. This can help determine a budget for savings each month. Muxlowe should view this as a household task and look at the bigger picture – living rent-free awards an opportunity to monopolise and rebuild your reserves. I would recommend that some of their income be earmarked for an emergency fund. Assuming they are both first-time buyers, she should consider lifetime Isas to build up a deposit. You can save £4,000 each year up to the age of 50, and the Government will add a 25pc bonus to your savings up to £1,000 every year. At this stage, I would prioritise savings over retirement goals – I would not forget that being self-employed means she needs to take control over her own provisions. Muxlowe should contact her old employer to understand if she was enrolled in any pension schemes to ensure she knows what her starting point is. If she's struggling to find any details, she can use the pension tracing service for lost schemes. Muxlowe should also ensure her National Insurance payments are up to date and being paid towards building her state pension provisions. If she feels she can pay into a pension, and still realise her savings goals for a property, Muxlowe should consider a personal pension plan. Being self-employed, she needs to arrange this herself. Your pension provider claims tax relief from the Government at the basic 20pc rate and adds it to your pension pot – this is limited to 100pc of what you earn. I would advise that the main priority is to build the routine of regular savings and develop more awareness of what is possible with monies in/monies out to save. Understanding her goals for a house purchase is essential – what she needs and the timescales.