For some time, pensions have been seen as one of the main investment vehicles available.
They offer income tax relief on contributions, the potential for capital growth, and – since 2017 – pensions have usually fallen outside an individual’s estate for Inheritance Tax (IHT).
This has provided a strong mitigation strategy for IHT, allowing people to spend other assets first and preserve pension funds as a legacy tool, which can be passed down tax-free if death occurs before the age of 75.
However, that landscape is changing and pensions will be brought into the scope of IHT from April 2027.
With less than 12 months until the reform, it is important to understand how these changes affect you and ensure you are in the most financially responsible position for you and your family.
For many, this will necessitate the most significant financial planning changes in recent years to reduce the risk of an unexpected IHT bill.
What is changing from April 6 2027?
Under current rules, unused defined contribution pensions (SIPPs and many workplace DC schemes) typically sit outside of your estate for inheritance tax purposes.
From April 6 2027, the value of unused pension funds and certain pension death benefits will be brought into the IHT regime, meaning they may be counted when calculating the taxable value of an estate.
This will alter how wealth is accumulated, preserved and ultimately passed on to future generations.
The extent to which you are affected will depend on the size of your overall estate, your pension value and how your assets are currently structured.
It’s therefore important that you review plans, understand your potential exposure and adapt your approach to planning before this change is introduced.
One of the less talked about changes is how the role of executor will change. At present, pensions are managed via an expression of wish and the trustees of the pension scheme (usually the provider) will action any changes.
Under the new rules, personal representatives are expected to carry more responsibility for reporting and paying any IHT due on unused pension funds, meaning the role of an executor will become more involved.
They will need to gather accurate information on pension values, liaise with the pension providers and ensure IHT calculations are accurate and submitted correctly. In most cases, the estate remains responsible for paying any IHT liability before distributions are made to beneficiaries.
Should you still pay into a pension?
You may be wondering if it is still worthwhile paying into a pension.
The answer is yes, but the amount of contributions and the reason for doing so may be different.
Pensions should not be seen as an unattractive option and continue to offer valuable benefits such as employer contributions, tax relief and investment growth.
Your current planning may still be efficient, but a review may be necessary and consideration should be given to the wider context of your retirement needs and estate planning objectives rather than as a default approach.
How can you plan for pension Inheritance Tax changes?
Where a new or increased IHT liability is identified, early planning becomes crucial to give you the greatest flexibility and the widest range of options.
Understanding the current value of your estate and modelling how it may grow over time allows you to quantify any potential exposure.
From there, gradual steps can be taken to help manage the position in a controlled and tax-efficient way.
There are number of mitigation strategies to help reduce or manage your Inheritance Tax exposure, including:
- Restructuring assets
- Adjusting contributions
- Making use of gifting allowances
- Planning larger gifts in line with the seven-year rule
- Drawing pension income strategically
- Considering protection solutions such as life insurance
Consideration should also be given to the number of pension arrangements you hold.
Many individuals accumulate a number of pensions over their working lives and consolidating them may simplify the picture, although advice should be sought to avoid the loss of potentially valuable benefits and guarantees.
With the right guidance, the upcoming changes need not be a cause for concern, but rather an opportunity to build a clearer and more robust financial plan for the future.
