The UK’s Autumn Budget 2024 has introduced transformative changes to pension rules, significantly impacting both domestic and overseas pension holders. In a historic move, the government has announced that pensions will now fall under Inheritance Tax (IHT) regulations starting in 2027, a decision that redefines legacy planning for UK residents. Adding to this is the 25% Overseas Transfer Charge (OTC) on pensions transferred to Qualifying Recognised Overseas Pension Schemes (QROPS) within the European Economic Area (EEA) and Gibraltar, sparking questions for UK expats about how best to safeguard their retirement savings.
UK Pensions Now Subject to Inheritance Tax (IHT)
In the past, UK pensions were one of the few tax-efficient ways to leave wealth to beneficiaries, exempt from IHT. This is set to change in 2027 when inherited pensions will be taxed at the standard IHT rate of 40% on estates exceeding the £325,000 threshold. For those with significant assets, including family homes, the additional Residence Nil Rate Band (RNRB) provides some relief, adding up to £175,000 if a primary residence is left to direct descendants. However, for estates valued over £2 million, the RNRB tapers off, making larger estates more susceptible to high tax burdens.
For high-net-worth individuals and retirees with substantial pension pots, this shift means a considerable IHT liability, transforming how families pass on wealth. Estate planners and financial advisors are already encouraging pension holders to consider alternative structures, such as trusts or gifting strategies, to help reduce IHT exposure and ensure that more of their hard-earned savings reach the next generation​
QROPS Transfers Face 25% Overseas Transfer Charge
Another significant update in the 2024 Budget is the Overseas Transfer Charge (OTC), applying a 25% tax on pension transfers to QROPS in the EEA and Gibraltar. Previously, these transfers could be made without an OTC, providing tax advantages for UK expats moving abroad, especially within Europe. The new 25% charge now changes the cost-benefit equation for UK citizens living overseas, prompting them to reassess the practicality of transferring their pensions to QROPS.
For retirees and professionals who have built substantial pension savings and plan to live abroad, the increased charge means that transferring pensions out of the UK may no longer be as financially viable. This could influence expatriates to retain UK-based pensions or seek advice on locally advantageous pension structures in their country of residence. The government’s goal with the OTC is to keep pension assets within the UK tax framework, ultimately discouraging outward transfers that bypass UK taxes​
What These Changes Mean for Your Pension Planning
As pensions enter the IHT fold and overseas transfers become more costly, individuals are advised to take proactive steps to protect their retirement assets. The new IHT inclusion makes it crucial to explore estate planning tools like trusts or strategic gifting that could reduce tax burdens for heirs. For those considering QROPS, the 25% charge highlights the importance of weighing local pension options against potential tax benefits and consulting with a qualified financial advisor to evaluate all available routes.
The Autumn Budget 2024 has marked a turning point in pension policy, impacting both UK residents and expats with UK-based pensions. As these changes come into effect, staying informed and adapting strategies will be key to optimizing retirement savings in an evolving tax landscape. Consulting with financial professionals familiar with both UK and international tax systems can help navigate the intricacies of the new regulations and ensure that retirement savings are optimized and protected for the future.
For more insights and personalized advice on managing pensions under the latest UK tax rules, please contact us.
