How to Protect Your Pension from Inheritance Tax, by Steve Conley
The rules around pensions and inheritance tax are changing, and it’s important to be prepared. From April 2027, pensions will no longer be exempt from inheritance tax (IHT), meaning that without careful planning, a significant portion of your hard-earned savings could end up with the taxman instead of your loved ones.
This has left many retirees wondering: What can I do to protect my pension and ensure my family benefits as much as possible? The good news is, there are several practical strategies that can help. Let’s explore them.
1. Gifting to Family While You’re Still Here
One of the simplest ways to reduce inheritance tax is by gifting money to loved ones while you’re still around to see them enjoy it.
- Regular gifts from “excess income” (income you don’t need for day-to-day expenses) are immediately IHT-free if properly documented.
- Lump sum gifts can also be made, and if you live for at least seven years after giving them, they won’t count towards your taxable estate.
- Many retirees are using this strategy to help with grandchildren’s school fees or supporting their children in buying a home.
2. Using Trusts to Protect Your Wealth
Trusts can be a useful way to pass on your pension savings efficiently, offering flexibility and control over how your money is used after your passing.
- Setting up a trust can help reduce or eliminate IHT liability, ensuring your wealth is protected for future generations.
- Trusts can be complex and require professional advice, but they remain a powerful tool for wealth preservation.
3. Investing in Property to Maximise Inheritance Tax Allowances
Some retirees are choosing to upsize their property using pension withdrawals. Why? Because the main residence nil-rate band allows a couple to pass on up to £500,000 tax-free through property inheritance.
- If your current home is worth significantly less than this threshold, investing in a larger property could be a strategic way to safeguard more of your wealth.
4. Charitable Giving to Reduce Tax Rates
Giving to charity is not only a great way to make a difference but can also reduce your IHT bill.
- If you leave 10% or more of your estate to charity, the IHT rate on the remainder of your estate reduces from 40% to 36%.
- Donor-Advised Funds (DAFs) allow you to donate tax-efficiently while keeping control over where and when funds are distributed.
5. Nominating Beneficiaries Correctly
Making sure your pension provider knows who should receive your pension when you pass away is critical.
- If a nominated beneficiary is not named, the pension may be taxed differently or paid out in a less efficient way.
- If you’re under 75, leaving your pension to a spouse or family member can ensure they inherit tax-efficiently.
6. Considering Annuities and Tax-Efficient Investments
Some retirees are choosing to draw down their pensions now and reinvest in tax-efficient products.
- Annuities can provide a stable income while allowing you to gift excess income tax-free.
- Other tax-efficient investments can help reduce overall exposure to inheritance tax.
Act Now to Secure Your Family’s Future
The introduction of inheritance tax on pensions is a major shift, but with the right planning, you can protect your wealth and ensure your loved ones benefit. Whether it’s gifting money, using trusts, or making smart investment decisions, there are options available to keep more of your hard-earned savings in your family’s hands.
If you’d like to explore the best approach for your personal situation, seeking expert advice can help you make informed and confident decisions. Now is the time to act—before the rules change.
Want to learn more about protecting your wealth for future generations? Reach out today for personalised guidance on inheritance tax planning and pension strategies.
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