Here’s What It Means for Your Estate…
From April 2027, significant changes to Inheritance Tax (IHT) rules regarding pension funds will come into effect in the UK, fundamentally altering estate planning strategies. Currently, unused defined contribution pensions are generally excluded from a deceased person’s estate for IHT purposes. This allows pension wealth to be passed on efficiently, especially if death occurs before the age of 75, enabling beneficiaries to receive funds tax-free, or with income tax obligations if death occurs after 75.
However, the upcoming changes mean that unused pension savings will be included in the deceased’s estate for IHT calculations. As a result, remaining pension funds could be subject to IHT at 40%, depending on the total value of the estate. The standard IHT threshold of £325,000 per person remains unchanged, alongside the residence nil-rate band of £175,000 when passing on a home to direct descendants.
This policy change introduces the potential for double taxation. In the case where the deceased was over 75, the pension funds would first be subject to IHT, and any withdrawals made by beneficiaries would then be taxed at the beneficiary’s marginal rate of income tax. This could result in effective double taxation.
Given these significant changes, it is crucial to review estate planning strategies. To mitigate IHT liability, and subject to appropriate investment advice, options could include drawing from pension savings during retirement to reduce the pot size, making lifetime gifts which are exempt from IHT if given more than seven years before death, and reviewing and updating wills and beneficiary nominations. There may also be other options to explore with a professional adviser, such as tax-efficient investments or trusts. The suitability of any course of action will depend on your overall assets, funding requirements and personal circumstances.
While pensions will continue to benefit from tax-free growth and the option to withdraw 25% tax-free cash, they are no longer a “safe haven” from IHT. This shift signals a return to the traditional purpose of pensions as retirement income rather than estate planning vehicles. Therefore, careful planning is crucial to balance retirement income needs with efficient wealth transfer strategies.
At Simmons Gainsford, our team of experienced consultants can help you adapt your estate planning strategies to these new rules. Please contact us today to schedule a complimentary consultation: 01825 746 888 / mail@sgllp.co.uk
Disclaimer:
This article is for general information purposes only and does not constitute investment, pensions, or financial advice. Simmons Gainsford is not authorised to provide regulated investment or pensions advice. Should you require advice in these areas, we would be pleased to introduce you to our dedicated financial services team, who are authorised to assist with your specific needs.