Retirement Planning

2024 Pension Tax Changes: Protect Wealth with QNUPS and IUL

Updated 
October 30, 2024
3
 min read
CEO, Capital for Life

Pension Inheritance Tax Changes 2024: Protect Wealth with QNUPS and IUL

New UK Inheritance Tax Rules on Pensions

Proposed UK inheritance tax (IHT) changes will significantly impact estate planning for high-net-worth individuals from April 2027.

Labour Chancellor Rachel Reeves recently announced that inherited pensions will now be subject to IHT. Any pension assets above the £325,000 threshold could face a 40% tax. These pensions inheritance tax changes require strategic solutions for those aiming to protect wealth for future generations.

Capital for Life, a high net worth client life insurance specialist shares how Index Universal Life (IUL) can help reduce the impact of these changes.

The New Pension Taxation Landscape

This shift ends the long-standing exemption for personal pensions from UK IHT. Beginning in 2027, pension pots will be taxed like any other asset, pushing many estates into the taxable bracket. For high-net-worth individuals, this means rethinking retirement strategies and planning earlier to navigate both pension and traditional asset taxation.

Impact on QNUPS

Labour’s plan also subjects Qualifying Non-UK Pension Schemes (QNUPS) to UK IHT. Despite this, at Capital for Life, we believe QNUPS remain a valuable estate planning tool for high-net-worth individuals.

IUL: Enhancing QNUPS for Estate Planning

Adding an Indexed Universal Life (IUL) policy alongside a QNUPS can help cover the newly proposed IHT liabilities and further protect wealth. An IUL policy provides a death benefit that offsets the proposed pensions inheritance tax exposure, ensuring more value is passed on to beneficiaries.

IUL policies also offer tax-free growth and easy access to cash value, subject to QNUPS rules, and a strategic hedge against the upcoming 40% pension IHT outlined in Labour’s October 2024 budget.

Example: Managing Pension IHT and Maximising Wealth

Consider the following scenario to see how combining QNUPS and IUL can mitigate IHT and enhance wealth:

Scenario

  • 50-year-old male, non-smoker, with a £1 million pension pot
  • Plans to retire at 61 and draw an annual income of £50,000 from his QNUPS

Assumes no growth in pension pot and no changes no pension commencement

Standard QNUPS Pension Planning

Assumes the pension holds a standard mix of bonds and stocks.

  • Pension Inheritance Tax Liability: Assuming the nil-rate band is fully used, the remaining pension is subject to 40% UK IHT
  • IHT on Pension Calculation: £1,000,000 × 40% = £600,000

Enhanced QNUPS with IUL Policy

Assumes the pension holds an IUL with £1,000,000 of cash value.

  • Indexed Universal Life (IUL) Policy: The client also holds an IUL policy with a £3,200,000 death benefit
  • IHT on IUL in QNUPS: The death benefit is taxed at 40%, resulting in £1,280,000 of IHT being payable
  • Net Death Benefit: £3,200,000 - £1,280,000 = £1,920,000 left to inherit.

Total Wealth Left to Beneficiaries:

  • From a Standard QNUPs: £600,000
  • From an Enhanced QNUPS: £1,920,000

The Enhanced QNUPS with an IUL leaves the next generation 3.2X the amount of a non-IUL QNUPS.

Conclusion: Benefits of IUL and QNUPS Together

Even though the IUL death benefit is subject to IHT, it significantly increases the wealth transferred to beneficiaries:

  • Tax Coverage and Wealth Creation: The IUL death benefit more than covers the IHT due on a pension, leaving an additional substantial inheritance.
  • Net Wealth Increase: Without the IUL, beneficiaries would receive just £600,000 from the pension. With the IUL, they receive £1,920,000, resulting in a net increase of 3.2 more wealth to be inherited. This example highlights the effectiveness of using IUL within a QNUPS structure to maximise wealth transfer.

Contact Us for Estate Planning with QNUPS and IUL

Concerned about how the proposed pension inheritance tax changes will impact your estate? Contact our team at Capital for Life on enquiries@capitalforlife.com.

We specialise in tax-efficient solutions like QNUPS and IUL to protect your legacy. Book a consultation today to secure your estate against rising tax liabilities.

Case Study
2024 Pension Tax Changes: Protect Wealth with QNUPS and IUL

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