بِسۡمِ اللهِ الرَّحۡمٰنِ الرَّحِيۡمِ
Pensions have long been a crucial component of estate planning, offering both financial security in retirement and potential tax advantages for wealth transfer. However, significant changes to inheritance tax (IHT) rules set to take effect from April 2027 are reshaping the landscape of pension contributions and estate planning.
Current Importance of Pension Contributions
Pension contributions have been an attractive option for estate planning due to their IHT-exempt status. This has allowed individuals to build substantial pension pots that could be passed on to beneficiaries free of IHT, making them a valuable tool for intergenerational wealth transfer.
Upcoming Changes in April 2027
From April 2027, the government plans to bring most unused pension funds and death benefits within the scope of Inheritance Tax (IHT). Key changes include:
- Unused pension funds will be included in the value of a person's estate for IHT purposes.
- Death benefits payable from pensions will also be subject to IHT.
- These changes will apply to defined contribution arrangements and lump sums from defined benefit arrangements.
Implications for Estate Planning
The new rules will have significant implications for estate planning:
- Increased IHT liability: Approximately 10,500 more estates are expected to become liable for IHT.
- Double taxation risk: Beneficiaries may face both IHT and income tax on inherited pensions.
- Review of existing plans: Many individuals will need to reassess their estate planning strategies.
Who inherits the Remaining Pension Pot?
From an Islamic law perspective, the treatment of pension contributions in estate planning varies depending on the type of pension scheme:
- Some pension schemes which are Sharīʿa-compliant may be fully considered as part of the estate from a Sharīʿa perspective and hence subject to Islamic inheritance law.
- The UK NHS Pension scheme has been deemed permissible by some local scholars.
- The NHS pension scheme (a defined benefit scheme) is compulsory with a nominated beneficiary and it is not considered to fall within the concept of estate (tarka) from a Sharīʿaperspective and hence not subject to distribution under Sharīʿa.
- Personal pension schemes (e.g., SIPPs) if invested in Sharīʿa-compliant options will be considered part of the deceased's estate (tarka) and subject to Islamic distribution rules as well as annual zakah.
- From an English law perspective the NHS pension scheme operates under a discretionary trust which means the trustees have the authority to decide who receives the benefits. Currently, the designated nominee receives the unused pension pot without any need for grant of probate or letters of administration. If there is no nomination the surviving spouse receives the benefits as well as the lump sum payable upon death. These payouts (benefits) do not form part of the estate of the deceased under current legislation and hence are not subject to intestacy law.
Conclusion
The upcoming changes to IHT rules on pensions mark a significant shift in estate planning. While pensions will continue to play a crucial role in retirement planning, their effectiveness as an IHT mitigation tool will be reduced. Individuals, particularly those with substantial pension savings, should review their estate plans and consider alternative strategies for wealth transfer. From an Islamic perspective, the treatment of pensions in estate planning remains complex and dependent on the specific type of pension scheme, emphasizing the need for careful consideration and seeking appropriate advice.
Dr. A. Hussain, 2024