The way pensions are treated for Inheritance Tax is set to change significantly from 6 April 2027, and families with substantial pension savings may need to reconsider their estate planning.
The changes have also attracted attention from the legal and financial advice professions. Ansons Law Managing Director Martin De Ridder recently contributed to discussions featured in FT Adviser about the potential impact of the reforms and the importance of taking a coordinated approach to estate and financial planning.
From 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of a person's estate for Inheritance Tax purposes.
Under the current rules, many pension arrangements can generally pass to beneficiaries outside the estate for Inheritance Tax purposes. The new rules will change this position, meaning unused pension wealth could form part of the calculation when determining whether Inheritance Tax is payable.
The changes will apply to both defined contribution and defined benefit arrangements, subject to specific exemptions.
For some families, the changes could increase the amount of Inheritance Tax payable when someone dies.
HMRC estimates that, in 2027/28, around 10,500 estates could face an Inheritance Tax liability where they would not have done previously, while approximately 38,500 estates could pay more Inheritance Tax as a result of pension wealth being brought into the calculation. HMRC estimates that the average additional Inheritance Tax liability could be around £34,000 for affected estates, although these figures are projections and individual circumstances will vary.
The changes may therefore be particularly relevant to individuals who have accumulated significant pension savings but have not yet needed to draw on those funds.
The interaction between pensions, Inheritance Tax and estate planning is becoming increasingly complex.
Decisions about whether and when to draw pension benefits can have wider consequences for your estate and the people you ultimately want to benefit from your wealth. However, there is no single approach that will be appropriate for everyone.
The right strategy will depend on factors including the value and type of your pension arrangements, your other assets, your income requirements, your intended beneficiaries and your wider estate planning objectives.
It is also important not to make significant financial decisions based solely on the forthcoming Inheritance Tax changes without considering the wider tax and financial implications.
With the rules changing from April 2027, now is a good time to review your estate planning arrangements and understand how your pension savings could affect your estate.
At Ansons Law, our legal team can help you understand the potential implications for your estate and work with your existing financial advisers where appropriate to ensure your estate planning reflects your circumstances and objectives.
If you are concerned about how the changes to Inheritance Tax could affect your pension and the inheritance you leave to your family, our team can help you understand your options.
Based across our offices in Lichfield, Cannock, Sutton Coldfield and Dudley, we offer a first conversation with no pressure and no obligation, so you can understand where you stand before deciding anything.
Talk to our wills, probate and trusts team
This article provides general information and should not be treated as individual legal, tax or financial advice. The rules surrounding Inheritance Tax and pensions are subject to change, and professional advice should be taken based on your individual circumstances.