From 6 April 2027, unused pension funds and some pension death benefits will be included in an individual’s estate upon death. These savings could therefore be liable to Inheritance Tax at 40% where an estate exceeds the nil-rate band.
If you have pension funds that you built specifically with IHT-mitigation in mind, a revisiting of your estate planning might be necessary. But cashing in your pension pot earlier than planned could have long-term consequences for your whole retirement, so knee-jerk reactions are to be avoided.
Instead, ask yourself some important questions about your retirement and inheritance plans, and speak to us about the best ways to manage these imminent changes.
Keep reading to find out more.
The Inheritance Tax treatment of pensions will change in 2027, bringing more estates into the tax net
Under current rules, the whole of an unused pension can generally be paid tax-free where death occurs before age 75 (so long as funds remain within the Lump Sum And Death Benefit Allowance). On death after 75, the beneficiary can still receive the whole fund, but will be liable for Income Tax at the highest rate they pay.
These rules have previously made pensions a useful IHT-mitigation tool, but that will no longer be the case. From 6 April 2027, most unused pension funds and death benefits will be included in your estate for IHT purposes.
The UK government expects the changes will see 10,500 estates become liable for IHT for the first time, while around 38,500 will face a higher IHT bill under the new rules.
MoneyWeek recently reported on a “rush” to take pension lump sums in light of the 2027 changes.
Around 116,000 55-year-olds accessed their pension in 2024/25. The figure marked a five-year high and was likely, at least in part, a reaction to the Budget announcement of 30 October 2024.
But this dash for cash won’t be the right choice for everyone.
3 important questions to ask yourself now
1. Will my estate be liable for Inheritance Tax?
Despite often being dubbed Britain’s most-hated tax, IHT is paid by relatively few estates. Government figures confirm that in 2022/23, just 4.62% of UK deaths resulted in an IHT bill.
This figure has been rising in recent years, due to the frozen nil-rate and residence nil-rate bands, and upcoming changes could see more families pulled into the scope of IHT. But before you make any significant decisions regarding your pension, it’s important to think about whether your estate has a potential liability.
The nil-rate band currently stands at £325,000, and the residence nil-rate band (applicable when you leave your main residence to a direct descendant) stands at £175,000 for the 2026/27 tax year. This means you can potentially pass on £500,000 IHT-free.
What’s more, transfers to spouses are free of IHT and remain so when the new rules come into effect on 6 April 2027. You can also transfer unused nil-rate and residence nil-rate bands, meaning you and your spouse can effectively have £1 million of assets that sit outside of IHT.
2. Have my retirement plans changed?
Your retirement plans are a long-term strategy based on your desired retirement date, the potential cost of your retirement lifestyle, and your attitude to risk.
While the changes to IHT on pensions are headline-grabbing and worrying, it’s important to take a step back. Legislative changes occur all the time, but your long-term financial plan is usually robust and adaptable enough to cope.
If your retirement goals haven’t changed, it’s unlikely you’ll need to make wholesale changes to your plan in light of the April 2027 rules.
Releasing retirement funds earlier than planned could have long-term consequences. Your fund will need to last longer, and this could affect your standard of living in retirement, preventing you from doing the things you want to do or even meaning you need to return to work.
Retirement budgeting is complicated, with lots of moving parts, and a knee-jerk reaction now could add another layer of complexity.
3. Can I lower the value of my estate in other ways?
If your estate is likely to exceed the current IHT thresholds, you’ll want to mitigate a large bill without undermining your carefully considered retirement plans.
Lowering the value of your estate through gifting might be one option to consider.
If you planned to pass on wealth on death, moving to a strategy of “giving while living” could prove tax-efficient, while having other non-financial benefits too. Some HMRC exemptions allow you to give gifts that are immediately IHT-free, including the following:
- Annual exemption – £3,000 for the 2026/27 tax year.
- Small gifts exemption, which covers gifts of up to £250.
- “Normal expenditure out of income” exemption, which allows you to give a regular gift from surplus income.
You can read more about the benefits of giving while living and the exemptions that apply in our article, Legacy planning and the benefits of giving with a warm hand, which you might have read last summer.
Gifting in this way also means you’ll still be around to see the difference your money makes, helping you to build lasting memories for your loved ones. Your beneficiaries will also receive your money earlier in life, possibly when they need it most – when buying a first home or starting a family, for example.
Get in touch
If you’re looking for an independent financial adviser in Milton Keynes or Olney to help you manage upcoming IHT and pension changes, look no further. At Jane Smith Financial Planning, we’ve been helping clients for 30 years, so contact us at info@janesmithfinancial.com or call 01234 713131 to see what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate estate planning or tax planning.
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