From 6 April 2027, pensions will no longer remain untouched by inheritance tax (IHT), marking a significant shift in retirement and estate planning. This new landscape will require pension scheme members to rethink how they manage their savings, beneficiaries, and estate plans. Let’s break down the implications and outline what you can do now to prepare.
What’s Changing?
Under current rules, unused pension funds are often viewed as a tax-efficient way to pass wealth to loved ones. However, from 2027, unused pensions and death benefits payable from pensions will be included in a person’s estate for IHT purposes.
This change means:
- Uncrystallised Defined Contribution (DC) funds and unused drawdown funds will be taxable as part of your estate.
- Short-term annuities and some lump-sum death benefits may also be included.
- Spousal exemptions apply: Transfers to a spouse or civil partner will remain exempt from IHT.
What Does This Mean for You?
The inclusion of pensions in IHT calculations could lead to significant tax liabilities for beneficiaries. For example:
- Personal representatives will need to calculate and pay IHT within six months of death, or face interest penalties.
- Beneficiaries may encounter “double taxation” if they also have to pay income tax on inherited pension lump sums.
For estates already subject to IHT, the combined impact could push effective tax rates to over 50%—and in some cases, even higher.
Potential Problems to Be Aware Of
- Administrative Delays: Calculating IHT will involve both pension administrators and personal representatives, increasing the likelihood of delays.
- Discretionary Payments: Scheme trustees or administrators deciding on beneficiaries may face time pressures, especially if the deceased left no clear instructions.
- Unintended Consequences: Without careful planning, beneficiaries may be hit with high tax bills, leaving less of your estate intact.
Steps You Can Take Now
While these rules are still under consultation, there are proactive measures you can take to protect your loved ones and ensure your retirement plans remain effective.
- Review Your Nominations
Ensure your pension expression of wish forms are up to date. Consider naming beneficiaries now—such as children or other non-spouse dependants—while IHT does not apply. You can revise these forms closer to April 2027. - Consider Tax-Efficient Gifting
If you withdraw funds from your pension, you could:
- Use annual IHT gifting allowances (e.g., £3,000 per year).
- Make regular gifts from income if you have surplus income.
- Start larger gifts early to take advantage of the seven-year tapering rule.
- Prioritise Cash Flow Modelling
Work with a financial planner to determine how much you’ll likely leave in your pension. Balance the need for a secure retirement income with opportunities to reduce IHT exposure. - Explore Trusts and Other Investments
Consider options such as:
- Spousal bypass trusts (though these can have limitations).
- Moving funds into ISAs or trusts to shelter wealth from IHT.
- Lifetime annuities with creative solutions to preserve value.
- Get Married (If It’s Right for You)
Passing pensions to a spouse or civil partner remains IHT-exempt. If you’re in a long-term relationship but not married, this could save your estate significant tax. - Charitable Donations
If leaving a legacy is important to you, consider naming a charity as a beneficiary. Lump sums left to qualifying charities will remain exempt from IHT.
The Importance of Personalised Advice
These changes underscore the value of professional financial planning. Avoid rushed decisions based on speculation—every plan must reflect your individual circumstances, goals, and family needs.
A trusted adviser can help you navigate this evolving landscape, balancing the needs of your retirement income with your estate-planning goals. Tools like cash flow modelling and tax-efficient gifting strategies can help you make informed decisions about your future.
Don’t Panic: There’s Still Time
While these changes are significant, they’re not yet final. The consultation runs until January 2025, and we’re likely to see further details emerge. For now, the best step you can take is to stay informed, review your plans, and seek advice if needed.
How We Can Help
At the Academy of Life Planning, we’re here to provide you with the clarity and tools you need to make informed choices. Whether you’re reviewing your estate plan or considering the impact of these changes on your retirement, our tailored guidance ensures you and your loved ones are prepared.
For more information or to book a consultation, get in touch. Together, we can ensure your wealth works for you and those who matter most.
Q&A: Understanding the New IHT Rules for Pensions from April 2027
Q: What’s changing with pensions and inheritance tax (IHT) from April 2027?
From 6 April 2027, unused pensions and certain pension death benefits will be included in the calculation of inheritance tax (IHT) when a person passes away. This means pension savings will no longer be fully outside the IHT net.
Uncrystallised defined contribution (DC) funds, unused drawdown funds, and some lump-sum death benefits will be subject to IHT. However, spousal or civil partner transfers will remain exempt.
Q: What types of pensions and benefits will be affected?
The following will fall under IHT rules:
- Uncrystallised DC pension funds: These are untouched funds not yet used to provide retirement income.
- Unused drawdown funds: Any remaining funds in drawdown accounts.
- Short-term annuities: These are temporary annuities set up for a limited time.
- Lifetime reversionary annuities (if paid to someone other than a spouse or civil partner).
- Pension protection lump sum death benefits: These could now attract IHT depending on circumstances.
Some exemptions include:
- Dependants’ scheme pensions: These are not subject to IHT.
- Charity lump sum death benefits: If paid to a qualifying charity, they are exempt from IHT.
Q: What is the impact of this change on beneficiaries?
The inclusion of pensions in IHT calculations will result in:
- Potential “double taxation”: If the deceased was over 75, beneficiaries may face both IHT on the pension fund and income tax on any withdrawals.
- Example: A higher-rate taxpayer beneficiary could face an effective tax charge exceeding 60%.
- Administrative delays: Pension scheme administrators and personal representatives (PRs) will need to coordinate, increasing the complexity and potentially delaying payouts.
- Higher overall tax bills: Families may need to pay IHT within six months of the death, or face late payment interest.
Q: How will IHT be calculated on pensions?
HMRC proposes dividing the nil-rate band (currently £325,000) across all parts of the estate, including pensions. Here’s an example:
- Total estate: £1.2 million
- Three pension schemes worth £200,000 each.
- Other assets worth £600,000.
- Nil-rate band split:
- £162,500 allocated to non-pension assets.
- £54,167 applied to each pension scheme.
The remainder of the pension value exceeding the nil-rate band will be taxed at 40%, with scheme administrators responsible for paying the IHT.
Q: What are the key planning challenges?
- Time pressures: IHT must be paid within six months, while discretionary payments or delayed communications could cause bottlenecks.
- Uncertainty for beneficiaries: Without clear beneficiary nominations, trustees or administrators may face difficulties deciding who should receive the funds.
- High tax rates: Combined IHT and income tax rates on pensions could leave beneficiaries with significantly reduced inheritances.
Q: What steps can pension savers take now?
- Update nomination forms
Make sure your pension expression of wish forms are current. If you plan to leave your pension to someone other than your spouse, consider doing this now, before the new rules apply. - Consider gifting strategies
If you plan to withdraw funds, you could:- Use annual IHT exemptions (£3,000 per year).
- Make larger gifts early to trigger the seven-year tapering rule.
- Regularly gift from income if it does not affect your standard of living.
- Plan withdrawals carefully
Avoid withdrawing too much from your pension to minimise income tax bills. Use cash flow modelling to strike a balance between living comfortably and reducing your taxable estate. - Explore trusts and annuities
Options like spousal bypass trusts or lifetime annuities may help preserve wealth. However, these come with complexities, so professional advice is essential. - Get married
Spousal transfers remain exempt from IHT. For unmarried couples, marriage or a civil partnership may protect pension wealth. - Donate to charities
If you nominate a charity to receive unused pension funds, these will remain exempt from IHT and income tax.
Q: How can advisers help with this transition?
Professional advice is critical. Advisers can:
- Provide cash flow modelling to help you understand how much of your pension you might leave behind.
- Create tailored estate plans to maximise tax efficiency.
- Assist with nominations and ensure your paperwork is up to date.
- Recommend strategies like trusts, annuities, or gifting to protect your wealth.
Q: Should I panic about these changes?
No, there’s no need to panic. The rules are not yet final, and HMRC is consulting with the industry until January 2025. While it’s important to understand how these changes might affect you, it’s equally important to avoid making rash decisions.
With proper planning and professional guidance, you can still protect your pension wealth and provide for your loved ones.
Q: Where can I get help?
At the Academy of Life Planning, we’re here to guide you through these changes. Whether it’s reviewing your estate plan, updating nominations, or exploring tax-efficient strategies, we can help you make informed decisions with confidence.
Take action today to secure your future. Contact us for a consultation and ensure your plans are ready for 2027 and beyond.
Academy of Life Planning 