Could Your Pension Become Part of Your Inheritance Tax Bill?.

For many years, pensions have been an important part of retirement planning – helping people build a fund that can provide an income throughout later life and in some circumstances, pass wealth on to the next generation.

However, from 6th April 2027, significant changes to the way pensions are treated for Inheritance Tax (IHT) could mean that the value of your pension becomes an important part of your estate planning.

If you have built up a sizeable pension and were planning to leave some or all of it to your family, it is worth understanding what the changes could mean for you.

What Is Changing?

Under the current rules, most unused pension funds are generally outside the scope of Inheritance Tax. This has meant that pensions can be an effective way of passing wealth to beneficiaries, depending on your circumstances. From 6th April 2027, however, most unused pension funds and pension death benefits will be brought into the value of your estate for Inheritance Tax purposes.

This doesn't necessarily mean that your family will automatically pay tax on your entire pension. Your overall estate, available allowances, exemptions and the circumstances of your beneficiaries will all need to be considered.
However, it does mean that pensions can no longer necessarily be viewed separately from the rest of your estate when thinking about your inheritance plans.

Why Could This Matter?

The standard rate of Inheritance Tax is currently 40% on the portion of an estate that is taxable. There is also the potential for beneficiaries to pay Income Tax on pension benefits they inherit, depending on their circumstances and the age at which the pension holder dies.

This means that in certain circumstances, the combined tax impact on pension wealth passed to beneficiaries could be significant.
For someone who has spent years building up their pension, this could make it particularly important to understand how their pension fits into their wider financial plan.

Who Could Be Affected?

The changes could be particularly relevant if you:

• Have built up a significant pension fund.
• Have other substantial assets, such as property, savings or investments.
• Expect your overall estate to be close to or above the available IHT allowances.
• Are planning to leave your pension to children or other family members.
• Have previously relied on your pension as a way of passing wealth to the next generation.
• Have assumed that your pension will automatically sit outside your estate for IHT purposes.

It is important to remember that there is no single pension value at which everyone will suddenly become liable for IHT. Your individual circumstances and the value and structure of your wider estate will determine the potential impact.

It Isn't Just About Your Pension

The 2027 pension changes are only one part of the wider IHT planning picture.

Your home, investments, savings, business interests and other assets can all contribute towards the value of your estate. Existing allowances and exemptions may also play an important role in determining whether IHT is payable.

For example, the Residence Nil Rate Band can provide an additional allowance where the relevant conditions are met, although it can be reduced where an estate exceeds the applicable threshold. This is why looking at your pension in isolation may not give you the full picture.

What Can You Do Now?

With the changes not taking effect until April 2027, there is still time to understand what they could mean for you and consider whether your existing plans remain appropriate.
This could include reviewing:

• Your pension arrangements - Understand how your pension could be treated under the new rules and how it fits alongside your other assets.
• Your wider estate - Consider the overall value of your property, pensions, savings, investments and other assets.
• Your beneficiaries - Think about who you want to benefit from your estate and how they may be affected by the tax treatment of any inheritance.
• Your existing estate planning - Your Will, pension nominations and wider estate planning arrangements should work together wherever possible.
• Your retirement strategy - The way you use your pension during retirement could become even more important when considering both your income needs and your long-term plans for passing wealth on.

Don't Wait Until 2027 To Review Your Plans

Changes to tax rules can make estate planning feel complicated, particularly when you are trying to balance providing for yourself during retirement with leaving something behind for your family.
The key is not to make decisions based solely on the headline changes. Instead, consider how the new rules could apply to your individual circumstances and whether your existing financial and estate plans still reflect what you want to achieve.

You can find more information on the 2027 IHT changes on our website-'Could the 2027 IHT Changes Affect Your Estate?'
If you are concerned about how the changes could affect your pension or the amount you may ultimately be able to pass on to your family, speaking to a financial adviser can help you understand your options and review your plans.