The UK government announced that from April 2027 any remaining unused pension on an individual’s death will count towards their estate for Inheritance Tax purposes. This is a big change which caused the Badger to holistically cogitate! Although farmers, in particular, are already angrily protesting, this change affects anyone, employed or planning retirement, with Defined Contribution (DC) pension schemes, the norm for most companies and auto-enrolment these days.
From April 2027 any unused pension will be included in a person’s estate for tax purposes. The beneficiary of the unused pension also pays Income Tax when they draw on their legacy. This is double taxation, the morality of which is questionable, and it means that if the beneficiary is a higher rate taxpayer, then their effective tax rate could be a whopping 64%. There’s no doubt that the government’s announcement will significantly change workforce attitudes towards pensions, inheritance planning, and retirement over the coming years.
This change doesn’t just affect the ‘wealthy’, it affects those in the broad IT industry that are ‘modestly comfortable’ too. If you’re employed in IT then you’re well paid compared with the UK average, you work hard for what you earn, and you’re likely to be in the ‘modestly comfortable’ category. The IT and tech sectors, important for the UK government’s economic growth aspirations, can be challenging but lucrative if you work hard and continuously develop your skills. In the Badger’s experience, IT people do indeed work hard, go beyond the call of duty, and most are prudent and make sacrifices to provide a modestly comfortable future for their loved ones. They deserve their rewards, but many will now find themselves, as reported recently in The I, in a similar situation to that of Louise Rollings, a single mum who worked for decades at an IT company. She comments:
‘The changes announced in the Budget make it feel as though people like me are being penalised for having worked hard, prioritised, budgeted and made sacrifices all our lives. As it stands, very little space has been left for people who have worked hard all their lives to build up modest estates to feel appreciated and rewarded. What’s the point in hard work if the rewards of all that ambition and determination are taken away in later years?”
Quite! If you work hard, make sacrifices, pay all your taxes, save and invest prudently, and contribute to a DC pension scheme (like governments encourage you to do and where you carry the underlying investment risk), then the question captured in Ms Rollings’ last sentence is very apt. If IT and tech are important for the country’s economic growth, then the government needs to encourage more and more people in these sectors to work hard. That’s not likely to happen if you know with certainty that the rewards from your effort will be taken away many years later…
