Inheritance Planning and State Pension Underpayments

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HM Revenue and Customs deploys hundreds more staff to deal with huge demand from women to correct their underpaid state pensions. A quarter of a million 18-year-olds thrilled to have got their university place and now facing the reality of how to afford... Ford taking it up, and the town in East Sussex, where the local Lewis Pound, is finally spent.

But first, on the 26th of November, the Chancellor, Rachel Reeves, will set out her Christmas list of the estimated £40 billion of tax presents she wants from us, all wrapped up in festive paper saying, Manifesto... pledge is not broken and fiscal rules kept.

Her autumn, well, almost winter budget is still 81 days away, but that hasn't stopped speculation about what will be in those expensive parcels. More on that later, but many of you are still puzzling about what she announced in her... last budget nearly a year ago now especially the change in 18 months time which will apply inheritance tax to unspent pension funds at the moment if you die with pension funds you haven't used they can be passed free of inheritance

tax to children or other heirs but if you die from the 6th of April 2027 those unspent funds will form part of your estate and if the total estate exceeds your threshold inheritance tax will be due on the A leader contacted us about how the tax would work for a couple. I read a very short article about inheritance tax changing in 2027 and I wasn't sure whether if the first person dies, the second person would then have to pay an inheritance tax.

on the pension that they receive from the person who's now died or whether that only applies once both people have died and therefore Who would pay that? Well, with me in the London studio is Kirsty Stone, a partner and chartered financial planner with the Independent Financial Advisors.

the private office. I mean, Kirsty Stone, Alida, is clearly confused about it. What are your clients telling you they're worried about when these changes begin? Yeah, I think Alida's right in that a lot of people think that inheritance tax is due as soon as someone dies. You do have that spousal exemption. So inheritance tax, if you are married or in a civil partnership, only applies to the second death.

And that applies equally to this new rule coming in about your pension? Absolutely. I think one key point to recognise is that if an individual dies with a pension under the age of 75, then a spouse would not pay anything on that pension fund when they come to draw. from it the rules are currently and will be moving forward that they will pay their marginal rate of income tax if the deceased died over the age of 75 but for other people

on the second death, for example, or if you don't have a spouse or a civil partner, then this rule does come in. And it applies to pension pots, doesn't it? Like self-invested personal pensions and money you've saved through a defined...

contribution scheme at work. How will that work when you die, if you don't have a spouse or a partner to leave it to? That's exactly it. So what will have to be reported is the value of the pension on your death. And this is defined contribution or personal pensions.

And then what the consultation has been going through over the last kind of year is actually who's responsible for paying that liability. And the hope is and the expectation is that the pension pot itself will fund that liability. Yeah, so you'll just get less of it. you say if the person has died over the age of 75 there will be income tax to pay so that's a double tax hit that can be

quite considerable. Yeah, this is the real controversy here is that essentially if someone dies over the age of 75 with unused pension funds, their estate will pay up to 40% inheritance tax and then their beneficiaries will pay their income tax rate, so 20, 40 and 40.

On what's left. So I think the market's about 64% for people in higher rate taxes. So it's quite a big hit. And what about using your pension fund, though? This is unused pension funds. What about using it to buy an annuity, getting rid of it? Does that get rid of the inheritance?

Yeah, so essentially at the moment what people are having to do is reconsider what they're using to cover their retirement. So previously very wealthy people would defer drawing on their pensions because they were exempt from inheritance tax. Now we're looking at pensions and saying...

This is perhaps the least valuable capital value asset to have on your death. So why not consider using it to generate an income? And then if you purchase a guaranteed income via an annuity, you are giving up a capital sum in exchange for guarantee. And that guaranteed income can last till after your death. But I think what's left when you die can be taken into account, can't it? In a strange sort of way. Yeah.

So that's not a way of avoiding it forever. And what about salary related schemes? Those are the ones paid by your employer, the ones that we call defined benefit or DB schemes. Now, there's no pension pot there. They're just paid to you, aren't they? And we had a listener, Paul, he wanted to know. about this. Here he is. I am lucky enough to have a number of defined benefit pension schemes that commence when I am 65 in two years time.

and I would like to ensure my financial planning is as efficient as it can be to provide security for my wife and I as well as support to my children and grandchildren in hopes that it will give them. a helping hand for the future my question is when it comes to db schemes how will the ihd changes be applied in the main how is the unused funds number calculated

Yeah, so Kirsty, these are salary-related schemes. Are they going to be caught at all by these new rules? No, so it's unchanged for final salary or defined benefit pensions. The only implication I would flag is if someone does die before drawing their defined benefit pension.

there could be some level of complication there. But generally speaking, if you receive an income from a final salary pension, that is not included in your estate for inheritance tax. And even if your spouse, your surviving spouse gets a 50% or 65% of it,

that they don't pay anything on it? No, they will not. Except normal income tax, of course. Now, of course, I must put this to you because the Treasury says, because people hate this, I know, but the Treasury says pensions are subsidised. I think it was over £50 billion last year. purpose is to fund retirement not to be used as a vehicle to pass wells down.

Isn't it fair enough that some of that's taken back through these taxes? I think people are very quick to forget that they do receive income tax relief when they put pension contributions in. So the idea is that when you take that money out, you could be paying less tax on taking it out.

I've alluded to financial planning is more complicated now you can't just ignore your pensions you need to think about what you want to do with them. Yes you've got to prepare and of course even before these changes all began in

what, 2015 or so, there was a hefty income tax charge on it, wasn't there? So it's not really that new. The other point to make, which the Treasury also made to us, is that more than 90% of estates will still pay no inheritance tax. It's going up from about 6 to about 10. who will pay it. So most people don't need to worry in a word. Absolutely.

That's a great word. But we're not losing you, Kirsty, because we're moving on now to the next budget, which was announced this week, will be on November the 26th. But I have to say, Rachel Reeves gave this warning to the BBC's economics editor, Faisal Ismail. about using those 81 days left to speculate about what she might do.

to me to decide what is in the budget and I will do that in a careful way getting the balance right between making sure that we've got enough money to fund our public services particularly our national health service whilst also ensuring that we can bring growth and investment to Britain. And people who seem to know what is in the budget before we have made those decisions are just wrong. Well, there's the message. And of course, Kirsty, the Chancellor won't leak her budget. Well, not yet.

because they do a few days before, don't they? But she does have to raise a lot of money and people are worried that she might raise it from them. How might she do it if she decided to? Yeah, I think the tricky part is their commitment to not increase income tax rates, so their commitment to do...

that or heavily tax working people so last budget we did see a slight increase in capital gains tax rates but they are still not equal to income tax rates so that's a key consideration and further attacks or further Issues around inheritance tax are definitely open to speculation. Let's come on to inheritance tax, but there's also the freeze, isn't there? Because the $12,570 that you can have before you pay tax, that's not changed since 2021.

It's supposed to end in 2027-8, but that could be extended further. Absolutely. And that is a key thing because ultimately people don't necessarily see that as a tax increase. But in your salary at the end of the month, you will see an increase in how much tax you're paying.

suggestions about inheritance tax which you mentioned that there should be a cap on gifts or they should tighten up on various things. What can people do about this? Because they're worried about it. Can they do anything now?

Understanding their position is very crucial. So understanding if you are needing to worry about inheritance tax now or in the future, for the most part, as they should, people will be spending their money. So they might not be paying inheritance tax when they do die much later in life.

People have a very, very pessimistic view on their own life expectancy and actually understanding where you stand as a family unit is important. And please make sure you're not trying to just give away all of your money and then leaving yourselves short. Yes, I mean, we heard this week that I think there's a record number of hundred-year-olds, aren't there, alive in Britain. So there is a long period to go. So basically your message is...

do nothing, don't worry about it, because we don't know, as the Chancellor very clearly said there, what she's going to do. I think trying to just be informed about your own position, but don't take any panic, reaction, action before you know. Never panic. Key message. Kirsty turned from the private office. Thanks. Moneybox will be looking at all these choices before and, of course, after the budget itself. You just realised your business needed to hire someone yesterday.

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HM Revenue and Customs has told this programme it's deploying hundreds of extra staff to try to reduce waiting times for people making claims about underpaid state pensions. It believes nearly 200,000 people, mainly women, who took time off... care for children might be getting less money than they should because of errors in how their national insurance record was calculated. HMRC has previously admitted it has proved what it called inherently challenging to fix this problem.

never afraid of an inherently challenging problem is here. Remind us then what the issue is. Yeah, so Paul, this is all about people, and as you say, mainly women, who took time off work to look after children between 1978 and 2010 if they claimed child benefits. Now, their national insurance records should have been updated with something called...

Home Responsibilities Protection or HRP. Now that would mean when they came to receive the state pension they wouldn't lose out just because of the years they spent raising children. The problem is the records weren't updated correctly. And that is what HMRC and the Department for Working Pensions are trying to fix. Trying to fix. What's the latest on it?

We know that for people who have put in a claim, the average wait time for a response from HMRC back in May was around 11 weeks. Well, it's now told us that's been cut to just four weeks for online applications and eight weeks for ones made through the post. So good news.

But, and this is a big but, Paul, this is in the context of only a small proportion of those rear payments being made. HMRC has identified just over 12,000 cases and paid out around £100 million. That's an average of more than £8,000. per person, so a lot of money. But that is out of an original estimate of nearly £1.2 billion that was owed. We're talking about people here like Christine Porter from Northampton. She spent years fighting to correct her pension before...

finally getting what she was owed just a few weeks ago, as I found out when I went to meet her. Hello, Christine. How are you doing? Fine. And how long have you been in here? Five years now. Hello. Hello. Ryan, how are you doing? Pleasure to meet you. Must be at least 100 sheets here. HM Revenue and Customs, the Department of Works and Pensions, Mike Reader. He is our local MP in Northamptonshire and it was just like banging your head against a wall.

Frustrating. Really exhausting. So we finally received a letter from the Departments of Works and Pensions on the 4th of August 2025. And after reading it through, we got to the very end and it said, we owe you the total sum of £4,599 for the period of 8th of March 21. to July the 17th, 2025. What was it like reading that letter? Christmas. It was amazing. It just felt like a weight had been lifting off our shoulders at last.

It had been sorted. Because this is your money. It's money you were entitled to. I would have been just happy getting my pension sorted. But to get the arrears paid back as well in a lump sum... It was amazing. We've added 2,000 of it to a savings account and we paid off our credit card and the 500 extra we kept for us and family.

Just treated different people in the family to odds and sods. It's nice to be able to do something for them. And you're using some of it quite rightly on yourselves. We've booked a holiday. We used that because we paid our credit card off. We used our credit card to pay for this holiday. So we're going over to Tenerife. Yeah, we've got a couple of, we've got a dark night striped book.

in the Brecon Beacons so we can go out and hopefully see the stars. What's your message to other people who might be owed this money who don't know it or haven't claimed it yet? Just keep pushing for it. It's your money. You earned it. Go for it.

So finally, Dan, Christine's persistence paid off. And if people want to go for it, as she suggested, and lots of emails are coming in about this topic as we speak, get what they're owed, what do they need to do? So they need to go to, they need to get online and go...

to gov.uk so that's the official government website and search for hrp that's home responsibilities protection now hmrc will point them to an eligibility checker which you can do if you want to and then people need to put in a claim either online or print the form off and then send it through the post now steve webb is a former pensions minister and now a partner at pensions consultants lane clark and peacock says that process is too complicated for lots of people though

The good news is that HMRC has tried to find some of the women who've missed out by writing letters and telling them about claiming. The problem is, when they wrote these letters, they didn't put a claim form in the envelope. They sent them to a website. They told them to do an online check first and only then to put in an application.

Lots of people who got these letters thought they were scams, people perhaps weren't online and were just very mistrustful and they just bin the letters. It's not that difficult to claim. You go on the gov.uk website, you fill in the claim form or print it out and send it in and I would encourage...

people to do that because there could be thousands of pounds waiting for them if they do. Indeed and what's the government had to say about this Dan? Well first of all that it's determined to make sure those people missing out on state pension payments do get their money whilst admitting as you said earlier Paul

that it's found it challenging to do that. So again, it suggests getting online, do that eligibility check we mentioned. Remember, gov.uk, search for HRP, which stands for Home Responsibilities Protection. And also HMRC says, look. If people aren't used to going online or they're not comfortable with it, ask a trusted friend or a relative to help. And there are, of course, charities like Age UK or Citizens Advice who can help too. And Paul, honestly, it can really be so well worth it.

One other case we've investigated at Moneybox saw the lady in question receive £35,500 in a lump sum and an extra £60 per week in her pension. This is serious money that people are owed. Indeed it is, OK. Thanks Dan.

Now, it's just a few weeks since a quarter of a million 18-year-olds got a university place and a record number got their first choice. But with them starting soon, many are wondering how they can afford it. The loan for tuition fees in England has risen 3.1% to 9,000.

£10,535 a year, and maintenance loans, which go towards rent and other living costs, are increasing by the same percentage to around £10,500 outside London. But many students soon realise that is nowhere near enough to cover the cost. student life. A higher education policy institute says it only covers half the cost. I'll be speaking to the director in a moment but first though let's hear from some students in a cafe in Bradford.

My name's Becca and I studied animal management. Just dropped out of my second year due to the fees and rising costs of everything, trying to support myself and support myself through the course because it only covers basically my rent. And obviously the bills that are included in with the housing. So I'm having to basically near enough work full time just to be able to live.

Hi, my name is Abdul. I'm 22. I'm studying Business Management at Leeds Met. I received maintenance loans, but unfortunately, that's not enough to cover my costs, like my rent, my food costs, my public transport, utility bills. doesn't cut it so i'm having to obviously work 20 hours part-time every week to kind of cover the shortfall but i'm still struggling i feel like it's just added pressure that's not kind of needed at this time i should

kind of be focusing just on my studies but I'm having to worry about working and covering all my costs at the same time. My name is Eva, I'm 19 years old and I work part-time alongside my studies at university. With the student fees I am aware that they have risen from what they normally were.

I think it is of concern as I was actually thinking of taking like a placement year but then obviously knowing that maybe they might charge extra I think it is a bit worrying so it's just knowing or well not knowing if I'll be able to pay back all that.

Well, listening to that in our Oxford studio is Nick Hillman. He's director of the charity, the Higher Education Policy Institute. I mean, Nick Hillman, you've done a study into maintenance loans in England. Are you surprised to hear that? Becker's dropped out. Abdul is struggling.

Eve is worried about debt? Sadly, I'm not surprised because the amount of support you get is not enough to cover the true... costs and some people are not going to university at all as a result of that some people are dropping out the biggest response the most common response is actually abdul's one which is where people students go out and find paid employment during term time a long time

alongside their studies. Their studies can get disrupted as a result, but students are actually doing everything they can very often to avoid dropping out and finding other ways to cover all their costs. Yes, I mean, 20 hours a week and being a full-time student is... It's quite a workload, isn't it? Outside London, the loan for most students is about £10,500 to pay for your maintenance. Your research, though, says you need double that, more like £21,000, £22,000. That might seem a lot.

to some people. Will you say the loan for most people is £10,500? That is true only if you're from a low-income household. If you're not from a low-income household, your parents are expected to supplement the loan and the loan will be less. But you're right. When we first did this work, which we've done with academics at Loughborough University and a company called Technology One, I was surprised by how high the number came out. But what we were measuring is not...

what students need to avoid poverty. What we were measuring is how much money do students need to get properly involved in student life. So that includes having a laptop. It includes being able to afford the bus fare to university.

evening so you can go and get stuck into your local society you know the club or society you're involved with if this is about allowing students to be fully involved with student life yes and of course rent which is going up way ahead of inflation isn't it so that's a that's the big chunk in fact

It can take all of this, can't it? Yes, it absolutely can. So we think first-year students, the people starting this year, will need about £21,000 living costs to be fully involved. And rent could very easily be getting on.

for half of that. Now that's what students need and we've been talking about the system in England. Things are different in Scotland, Wales and Northern Ireland very briefly because I know it's all very complicated. Well every part of the UK has a different maintenance system but England in many ways.

is the least generous. Northern Ireland is not very generous either, but Wales and Scotland are a bit more generous. There'll still be a surefall between the amount of support you get and the amount of money you need. But the other difference is England has... got rid of maintenance grants, the bit you don't have to repay.

whereas all the other parts of the UK still have some support through non-repayable grants. And they're not coming back, are they, in England, as far as we know. Now, the Department for Education told Moneybox we will publish our plans for higher education reform soon as part of a... the white paper. What would you like to see in that?

Well, there's so many things that could be done. Well, obviously, a step increase in the amount of the maintenance loan for students and also an increase in the parental threshold so that parents, you know, parents. find a huge shock when their student offspring go to university. They can't afford to support their student offspring. The threshold at which parents are meant to support their student offspring is £25,000 and has been £25,000.

since 2008. So a big increase. I would also like to see if the government doesn't accept our numbers for the costs of being a student, I'd like to see them do their own study. There hasn't been a really detailed government commissioned report on this since 1960.

Nick Hillman from the Higher Education Policy Institute. Thanks very much. And on this Wednesday's Moneybox Live, Felicity Hanna's taking a look at the cost of going to university. And you can get in touch with your questions, moneybox.bbc.co.uk or send a voice note or a message on WhatsApp. 306-783-183

The last of England's local paper currencies has gone. The Lewis Pound, named after the town in Sussex, was finally withdrawn on the 31st of August. A few years ago, there were at least six local currencies which people could spend locally. ago that last survivor ran out of steam. Dominic Chorney is from the 150-year-old coin and banknote dealer Walt the Baldwins.

I think it's a real shame to see the end of the Lewis Pound after 17 years. It represents the last in a run of experimental money projects across the country intended to support local businesses. But with cash use falling dramatically, use of local money like this in places such as Stroud, Brixton and of course Lewis suffered immensely.

Even though this year marks the end of the Lewis Pound, the strange local currencies will remain historic oddities and will surely fascinate economists for years to come. Dominic Chorney, well... We've not so much run out of steam as run out of time, as, sadly, this podcast always does. You can help set our agenda by emailing us, moneybox at bbc.co.uk, or sending us a voice note or a message on WhatsApp, 033.

In this podcast, the team was Dan Whitworth, Abba Mahmood, Catherine Lund and Joe Krasner. The studio manager was Isabel Whitehead. The editor was Craig Henderson. I'm Paul Lewis. That's the person, not the pound. And this was the BBC News, money and work production for BBC Sounds. Mickey's never seen this before. Oh, wow. It was just him. In homes across Britain, children and grandchildren are discovering stories about their families in the Second World War. I've never noticed it before.

It's a battered old suitcase. Do you want to open it? I'd love to open it. Not the war you're thinking of. The fight against the Nazis. The other story of World War II. The one on the Asian front against Japan. The battle was a gun battle, really, and kept on pounding them, pounding them, pounding them. I'm Kavita Puri.

From BBC Radio 4, the World Service and the History Podcast, this is The Second Map. 80 years after the end of that war, why don't we remember it as well as we should? Listen to The Second Map. first on BBC Sounds. and the BBC News Channel streaming live 24-7. From less than a dollar a week for your first year, read, watch and listen to trusted, independent journalism and storytelling. It all starts with a subscription to BBC.com. Find out more at bbc.com slash unlimited.

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