From April 2027, changes to the Inheritance Tax (IHT) treatment of unused pension funds and some death benefits could see your tax liability increase on death.
Originally announced by Rachel Reeves during her inaugural Autumn Budget in 2024, the change will see unused pension funds become part of your estate for IHT purposes for the first time.
This could require you to revisit your estate planning, and there are numerous strategies we could help you to adopt. There’s also one minor change that you might consider making now.
Keep reading to find out more.
Current rules see pension funds sit outside your estate, so beneficiaries can receive funds IHT-free
When you took out your pension, you were likely asked to name a pension beneficiary. This is the person to whom benefits will continue to be paid in the event of your death. You may well have chosen your spouse or civil partner. It’s also possible you filled out the form on autopilot and can’t remember who you chose.
Due to imminent pension IHT rule changes, now could be a good time to find out.
Under current rules, pension death benefits on death before the age of 75 can generally be paid tax-free. On death after age 75, withdrawals are taxed at the highest rate of Income Tax your beneficiary pays.
From April 2027, all unused pension funds and most death benefits will become part of your estate for IHT purposes.
Changing your nominated pension beneficiary now could reduce a potential Inheritance Tax liability
If your spouse is currently your pension beneficiary, they can already receive your pension funds IHT-free, and this spousal exemption remains under the new rules. However, when they pass away and your wealth moves down a generation to your children, there could then be IHT to pay.
For this reason, you might decide to change your beneficiary to your children now. This means that if you die before the new rules come into force in April 2027, they will receive your pension funds IHT-free, with Income Tax to pay only if you are over 75 at the date of death.
If you intend for your children to inherit your wealth at some point, this might be a tax-efficient way to do it.
Once the new rules come into force, IHT will be payable to whoever is named the beneficiary. At this point, it could make more sense to switch your beneficiary back to your married or civil partner.
Changing your pension beneficiary can be done simply through your pension provider
The beneficiaries of your wealth on death are usually named through your will. But pension beneficiaries need to be updated via your pension provider.
Contact them to find out who is currently named as the beneficiary and then request an “expression of wish” form if you need to make a change.
Whether you choose to make the beneficiary one of your children or another family member who you expect to benefit from your will, be sure to get back in touch with your pension provider after 6 April 2027. At this point, you will need to fill out the form again to switch your beneficiary back.
Remember, your plans are individual to you, and this won’t be the right course of action for everyone, so be sure to speak to us before you decide. It is also only one of several ways you might look to mitigate the impact of the new pension IHT rules.
Revisiting your estate plan could help to ensure it’s as tax-efficient as possible, whatever new rules come into force
Current rules provide a form of IHT shelter in unused pension funds, and it’s possible that your estate plans to this point relied on this protection. For this reason, the imminent change will likely require you to revisit your plans.
While a change of beneficiary offers a stopgap solution between now and April 2027, other measures could help you to strategically lower a potential IHT liability.
These might include lifetime gifting (or “giving while living”), which allows you to pass on wealth IHT-free in some circumstances. It also has the added benefit that you’re still around to see the difference your money makes to those who receive it.
You might also consider equity release, gifting the proceeds of a loan secured against your home to lower the value of your estate. There are important pros and cons to this and it’s certainly not a decision to take lightly.
Life insurance held in trust could also be an option, using a payout to cover the potential liability so that your loved ones aren’t burdened with the stress and financial worry of a large IHT bill. Again, there are important considerations here and trusts are incredibly complex, so be sure to speak to the professionals before making a decision.
Get in touch
These are just some ways in which professional financial advice can help. For more, please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you manage your long-term financial and legacy plans.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
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. 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.
Think carefully before securing other debts against your home. Equity release will reduce the value of your estate and can affect your eligibility for means-tested benefits.
The Financial Conduct Authority does not regulate estate planning, tax planning, or will writing.
