From 6 April 2027, most unused pension funds and certain pension death benefits will be brought within the value of a deceased person’s estate for Inheritance Tax (IHT) purposes. For individuals with substantial pension savings, this change makes it essential to review your estate planning now, rather than waiting until the new rules take effect.
For many people, pensions are among their most valuable assets and are traditionally associated with planning for retirement. The changes have been legislated for and will apply to deaths occurring on or after 6 April 2027.
What Is Changing to the Inheritance Tax Treatment of Pensions?
From 6 April 2027, most unused pension funds and pension death benefits will generally be included when calculating the value of an individual’s estate for IHT purposes. This represents a significant shift from the current rules, under which many pension funds can be passed to beneficiaries without forming part of the deceased’s estate.
The changes will apply to both defined contribution and defined benefit arrangements, subject to specific exclusions. As a result, pensions have historically been an important consideration when structuring an estate and planning how wealth will pass on death, and this remains true under the new regime, albeit for different reasons.
Importantly, death-in-service benefits payable from registered pension schemes will remain outside the scope of IHT. Certain dependant’s scheme pensions are also excluded from the changes.
The changes may particularly affect individuals who have accumulated significant pension savings and intend to leave some or all those funds to their beneficiaries. For example, an individual may have deliberately used other assets to fund their retirement while preserving their pension savings, with the intention that the pension would ultimately pass to their children or other beneficiaries. Under the new rules, the value of the unused pension may form part of the estate for IHT purposes and could therefore increase the overall IHT liability.
This does not mean that everyone should automatically change the way they access or manage their pension. Instead, it highlights the importance of considering pension arrangements alongside the rest of your estate planning and understanding how the changes may affect your individual circumstances.
How Do Inheritance Tax Allowances Apply to Pensions?
A pension being brought within the estate does not automatically mean IHT will be payable on it. The pension will form part of the overall estate when assessing whether the relevant IHT thresholds, exemptions and reliefs apply.
- The standard IHT threshold, the Nil-Rate Band, is currently £325,000 per individual.
- An additional Residence Nil-Rate Band of up to £175,000 may also be available where a qualifying residence is passed to direct descendants, such as children or grandchildren.
- These thresholds are set to remain at these levels until 5 April 2031.
For IHT purposes, the value of an estate can include money, personal possessions, property and other assets, together with assets brought into account under the relevant IHT rules. Where the value of the taxable estate exceeds the available allowances and exemptions, IHT may be payable.
Assets passing to a spouse or civil partner are generally exempt from IHT, subject to the relevant conditions. Gifts to qualifying charities can also be exempt. Certain lifetime gifts made within the seven years before death may also need to be considered when calculating the IHT position. The standard rate of IHT is currently 40% on the taxable portion of an estate.
Should You Change Your Pension Strategy?
The changes may lead some individuals to reconsider how and when they access their pension, whether to make lifetime gifts, or how their wider wealth is structured. However, there is no single approach that will be appropriate for everyone, and advice should be sought from your pension provider and your legal representative.
Taking additional income or withdrawals from a pension may have income tax implications and could affect the level of financial security available throughout retirement. Similarly, making substantial lifetime gifts can have legal and tax consequences and should be considered carefully, particularly considering the seven-year rule and other relevant provisions.
Estate planning should therefore not be undertaken solely with the aim of reducing a potential IHT liability. The starting point should always be your individual circumstances, financial position and objectives. The priority should be to ensure that you retain sufficient resources to meet your needs throughout your lifetime while making appropriate arrangements for those you wish to benefit from your estate. Advice should be sought from your pension advisor in conjunction with your legal representative.
Why Should You Review Your Will and Pension Arrangements?
Your Will does not necessarily determine who will receive your pension following your death. Pension death benefits are generally dealt with in accordance with the rules of the relevant pension scheme, so reviewing both together is a core part of effective estate planning.
Pension providers will usually allow you to nominate one or more beneficiaries and may also ask you to complete an expression of wishes setting out who you would like to benefit from your pension. It is therefore important to ensure that your Will and pension arrangements work together and continue to reflect your wishes.
Circumstances can change over time. Marriage, divorce, separation, the birth of children or grandchildren, changes in your financial circumstances, or the death of a named beneficiary may all affect whether your existing arrangements remain appropriate. The changes to the IHT treatment of pensions provide an additional reason to review your arrangements before April 2027.
This may be particularly important for families with more complex circumstances, including second marriages, children from previous relationships, or beneficiaries who may be vulnerable or require additional protection.
What Should You Review as Part of Your Estate Planning?
As part of a wider estate-planning review, it is sensible to consider whether:
- Your Will reflects your current wishes and remains appropriate for your circumstances.
- Your pension expression of wishes is up to date and accurately reflects who you would like to benefit.
- The beneficiaries nominated under your pension remain appropriate, particularly following any changes to your family or financial circumstances.
- Your pension arrangements are consistent with your wider estate-planning objectives and the intended distribution of your assets.
- You have considered the potential IHT consequences of your pension forming part of your estate from April 2027.
- You have sufficient liquid assets available to meet potential liabilities, including any IHT that may become payable in relation to pension assets.
From 6 April 2027, personal representatives will be responsible for reporting and paying any IHT due on unused pension funds and pension death benefits. HMRC has also introduced arrangements under which, in certain circumstances, pension scheme administrators may be directed to withhold funds to assist with payment of IHT.
Why Is Professional Advice Important for Estate Planning?
The changes to the IHT treatment of pensions highlight why estate planning should be viewed as an ongoing process rather than something completed once and then left unchanged. Your Will, pension nominations, property ownership, trusts, lifetime gifts and wider financial arrangements should work together to reflect your circumstances and achieve your long-term objectives.
For some individuals, relatively straightforward arrangements may be sufficient. However, those with larger or more complex estates may benefit from specialist advice to consider the interaction between Wills, pensions, trusts, lifetime gifts and IHT.
With the changes due to take effect from 6 April 2027, now may be an appropriate time to review your existing arrangements rather than waiting until the new rules come into force. Early planning can provide an opportunity to identify potential issues and consider whether changes may be appropriate.
How Do Lasting Powers of Attorney Fit into Estate Planning?
Estate planning is not solely concerned with what happens to your assets after your death. It should also consider how your financial and personal affairs would be managed during your lifetime if you were no longer able to make decisions for yourself.
A Lasting Power of Attorney (LPA) allows you to appoint someone you trust to make decisions on your behalf if you lose the mental capacity to do so yourself. There are two types of LPA: one covering property and financial affairs, and another covering health and welfare. Putting an LPA in place can therefore form an important part of a wider plan for protecting your interests and managing your affairs throughout your lifetime.
How Can CJCH Help with Your Estate Planning?
If you have not reviewed your Will or wider estate-planning arrangements recently, now may be an appropriate time to do so. A review can help ensure that your Will continues to reflect your current wishes, your pension nominations remain up to date, and your wider arrangements take account of the changes to the IHT treatment of pensions from April 2027.
Our Private Client team can advise on Wills, estate planning, Lasting Powers of Attorney and the potential implications of the changes to the IHT treatment of pensions. With decades of experience delivering tailored, dependable legal support, we are well placed to guide you through these changes and help ensure your arrangements reflect your wishes.
Our experienced Private Client team helps clients across South Wales and beyond secure their dream homes with our offices in Cardiff, Barry, Bridgend, Blackwood, Caerphilly and Swansea. With our 4.9-star Trustpilot rating and decades of hands-on experience, we combine technical legal excellence with dedicated, reassuring client care.
Frequently Asked Questions
Do I need to update my pension nomination before April 2027?
It is sensible to review your pension expression of wishes now, rather than waiting for the rules to take effect. Reviewing early gives you time to consider whether your nominated beneficiaries and wider estate planning remain appropriate.
What happens to my pension if I do not have a Will?
If you die without a Will, your estate, which may include your pension where the new rules apply, will be distributed under the rules of intestacy, which may not reflect your actual wishes. Having an up-to-date Will alongside a current pension nomination helps ensure your assets pass as you intend.
Will defined benefit and defined contribution pensions be treated the same way for Inheritance Tax?
From 6 April 2027, both defined contribution and defined benefit arrangements will generally be included when calculating the value of an estate for IHT purposes, subject to specific exclusions such as death-in-service benefits. The precise treatment can vary depending on the scheme, so it is worth seeking tailored advice on your specific arrangements.
If you have questions about how these changes may affect your estate planning, contact CJCH Solicitors’ Private Client team for advice tailored to your circumstances.
