What doctors need to know about the NHS pension and inheritance tax

At the 2024 Autumn Budget, it was announced that unused pension funds and death benefits could become subject to inheritance tax (IHT) from April 2027.

With this year’s Autumn Budget looming, you might be wondering what the latest is on this topic, and more specifically, what this means for your NHS Pension Scheme benefits.

Breaking down the headlines

The government’s proposal largely centres around defined contribution (DC) pension schemes, likely personal pensions and self-invested personal pensions (SIPPs).

As the NHS Pension Scheme is a defined benefits (DB) scheme, some benefits will continue to remain exempt from inheritance tax, including survivors’ pensions and children’s allowances.

As it stands, death in service lump sums sits within your estate, but it can be IHT exempt if it’s paid to a spouse or civil partner. Under the new rules, your death in service benefit will sit outside of your estate, meaning it will be exempt from IHT completely.

Which benefits are affected?

Money Purchase Additional Voluntary Contributions (MPAVCs)

The government’s announcement mainly brings a change to Money Purchase Additional Voluntary Contributions (MPAVCs). 

If you aren’t aware, MPAVCs are a ‘top-up’ arrangement that allows NHS Pension Scheme members to make extra contributions to build an additional investment pot for retirement.

It’s affected because MPAVCs are investment-based rather than guaranteed benefits, meaning they’re treated as part of your estate and are therefore subject to IHT rules.

Only a small number of scheme members have MPAVC savings, so this likely won’t be an issue for most. 

Pension Commencement Lump Sum (PCLS)

Your pension commencement lump sum (PCLS) will continue to be subject to IHT, as it is now.

Members of the reformed (post-2015) scheme can choose the level of lump sum vs. pension they receive. If this applies to you, it’s an important decision point to factor into your retirement and estate planning.

What should doctors do next?

Even if your NHS Pension benefits aren’t affected by inheritance tax, you should still consider taxation on any personal pensions or savings you hold.

For your personal pension, you might want to reconsider how you plan to use these funds, especially if you’d planned to pass the money to a loved one under the assumption it wouldn’t form part of your estate.

Additionally, if your property or investments continue to rise in value you could be pushed into the IHT bracket. Pair this with frozen IHT thresholds (until 2030) and you may find your estate facing unexpected IHT bills.

Reviewing your finances and estate plans ahead of the Budget will help you understand the potential tax exposure to your pension and assets – as well as ensuring your loved ones are provided for after you’re gone.

Estate planning with ease

If you’re looking to reduce your potential exposure to inheritance tax, there are legitimate ways to manage this.

This might involve steps like gifting money to your loved ones while you’re still alive or putting assets into trust. You can also consider gifting or increasing current donations to charity. This will not only reduce your estate by the gift amount but reduce the tax rate you could pay if you meet certain conditions.

As IHT rules can be quite complex, you may wish to get specific financial advice tailored to your circumstances. At Wesleyan Financial Services, we have Specialist Financial Advisers that can help.

They understand the complex financial challenges doctors face and will use their knowledge to help you build a strategy that balances your retirement goals with long-term legacy planning.

You can book an appointment to get started. Advice charges may apply.

Please note the Financial Conduct Authority (FCA) does not regulate Inheritance Tax planning and trusts. Tax treatment depends on your individual circumstances and may be subject to change in future.

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