For many people, a pension has long been seen as the sensible way to pass on wealth. Unlike other assets, pension pots sitting outside your estate meant they could be left to loved ones free of inheritance tax. It was one of the reasons financial advisers encouraged clients to draw on other savings first and leave their pension untouched for as long as possible.
That is about to change.
In the October 2024 Budget, the Government announced that unused pension funds will be brought into the inheritance tax regime from April 2027. If the plans proceed as set out, your pension pot will effectively form part of your estate when you die, and anything above the inheritance tax threshold could be taxed at 40%.
This is a significant shift, and one that affects far more people than the headlines about “the wealthy” might suggest.
The detailed rules are still being finalised through a consultation process, and there may be further refinements before April 2027. But the direction of travel is clear, and the broad shape of the change is not expected to shift significantly.
Why this matters beyond the very rich
Inheritance tax has always been seen as a tax on the wealthy, but the freeze on nil-rate band thresholds – the amount you can leave before tax kicks in – means that more and more ordinary families are being caught in its net. Add pension savings into the equation, and the numbers can change quickly.
Consider a couple in their seventies who own a modest home in Wales, have some savings, and between them have accumulated pension pots over a working lifetime. Individually, none of these assets might seem substantial. Combined, and with a pension pot now sitting inside the estate, the total value could easily push above the threshold – particularly if the family home has increased in value over the years.
If your existing estate planning was done on the basis that your pension would pass to your family free of tax, it may now need revisiting.
What happens to your pension when you die?
Currently, if you die before 75, your pension can usually be passed to a nominated beneficiary tax-free. If you die after 75, your beneficiary pays income tax on withdrawals – but the pension itself sits outside your estate for inheritance tax purposes. That is the rule that is changing.
From April 2027, the responsibility for reporting and paying any inheritance tax due on unused pension funds will fall to the executors of the estate – though pension scheme administrators will have new duties to support them in that process.
So what should you do?
The first step is not to panic – and not to rush into changing your pension arrangements without proper advice. The rules are not yet final, and there may be further changes before April 2027. What is clear, however, is that this is a good moment to take stock.
Here are a few things worth considering:
Review your will. If your will was written some time ago – or was structured around the assumption that your pension would sit outside your estate – it may no longer reflect your wishes or make the most of the allowances available to you. A solicitor can help you look at this with fresh eyes.
Check your pension nominations. Most pension providers ask you to nominate who should receive your pension when you die. This is separate from your will. It is worth checking that your nominations are up to date and still reflect your intentions, particularly given the changing tax position.
Think about the whole picture. Inheritance tax planning works best when it looks at all your assets together – property, savings, investments and pensions – rather than each in isolation. A change in how one asset is treated can affect the planning around everything else.
Speak to a specialist. If your estate is likely to be affected by these changes, it is worth taking advice sooner rather than later. There may be options, including making gifts during your lifetime, using trusts, or adjusting how you draw on your pension, that are worth exploring while there is still time before the rules change.
A note on timing
April 2027 may feel some way off, but estate planning is not something to leave to the last moment. Wills take time to get right. Some planning strategies need to be put in place years in advance to be effective. And the consultation process means there may be further changes or clarifications to navigate before the new rules land.
If you have not looked at your will or estate arrangements recently, now is a reasonable time to do so – not because everything needs to change, but because it is worth understanding where you stand before the landscape shifts.
If you would like to discuss how these changes might affect you, our private client team would be happy to help.
