Wealth
The way pensions are treated for Inheritance Tax (IHT) purposes is set to change from April 2027. For many people, this could have a significant impact on how they plan for retirement, pass wealth on to their families and structure their estate.
For many years, pensions have played an important role in estate planning because unused pension funds have generally fallen outside the scope of Inheritance Tax. However, following proposals announced by the Government in the Autumn Budget 2024, most unused pension funds are expected to be brought into IHT calculations from April 2027.
While the final details continue to develop, the proposed changes mean it may be a good time to review how your pension fits into your wider financial and estate planning.
Under the current rules, pensions can often be passed on to beneficiaries without forming part of your estate for Inheritance Tax purposes. This has led many people to preserve pension assets during retirement and use other savings or investments first, allowing their pension funds to potentially pass to future generations.
From April 2027, most unused pension funds are expected to be included when calculating the value of an estate for IHT purposes.
This means that, for some families, pension savings that were previously outside the scope of IHT could increase the value of an estate and potentially create an additional tax liability.
To understand the potential impact, consider a simple example.
Imagine someone has:
Under current rules, the pension may not be included when calculating the value of the estate for IHT purposes. The estate would therefore be valued at £510,000.
Under the proposed rules, the pension could be included, increasing the estate value to £860,000. Depending on the individual’s circumstances, this could result in a higher inheritance tax bill.
The impact will vary significantly depending on factors such as the value of your estate, your family circumstances and any available allowances or exemptions.
The changes highlight the importance of looking at retirement planning and estate planning together.
Traditionally, pension decisions have focused on generating sufficient income throughout retirement. However, for those with assets they hope to leave behind, decisions about how and when to draw income may also affect the eventual value of their estate.
A well-structured retirement strategy considers:
One of the key changes is that responsibility for reporting and paying any resulting Inheritance Tax will generally sit with the personal representatives of the estate, rather than the pension provider.
This could introduce additional complexity for families, particularly where pension beneficiaries and estate beneficiaries are different people.
For example, someone may nominate their pension benefits to pass to certain family members, while other assets such as property or investments pass through their will to different beneficiaries. Understanding how any potential tax liability would be dealt with could become an increasingly important part of estate planning.
Keeping pension beneficiary nominations up to date has always been important, but the proposed changes make this an area worth revisiting.
Your pension nominations should reflect your current wishes and work alongside your wider estate planning arrangements.
It is also worth considering whether your will, pension arrangements and other financial plans are aligned. Changes in family circumstances, wealth or legislation can all affect whether your existing arrangements remain suitable.
The proposed changes do not mean that effective estate planning is no longer possible.
Depending on your circumstances, there may be a range of options to consider, including:
The right approach will depend on your individual circumstances, objectives and financial position.
Tax rules change over time, and financial arrangements that were suitable in the past may not continue to provide the same benefits in the future.
The proposed pension and Inheritance Tax changes are a reminder that retirement planning and estate planning should be reviewed regularly, particularly where you have built up significant pension savings or want to pass wealth on to future generations.
Taking time to understand how the changes could affect you can help you make informed decisions and ensure your financial plans continue to reflect your goals.
At The Penny Group, we help clients understand how pensions, investments and estate planning fit together, creating long-term financial strategies designed around their personal circumstances.
If you are unsure about how pensions and Inheritance Tax changes might affect your finances, it could be helpful to speak with a qualified financial adviser who can review your situation and help you make informed decisions.
Email info@thepennygroup.co.uk or call 0207 061 2345 if you have any questions or should you wish to speak to one of our advisers.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
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The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
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