Your pension could soon be subject to Inheritance Tax| Should you review your plans before April 2027?

For many years, pensions have been one of the most tax-efficient assets to leave to your family. That is about to change. This change could increase the tax payable following a death and means that many families should review their wills, pensions and wider estate planning before the new rules arrive.

What is changing?

At present, many pension funds can pass to beneficiaries outside the deceased's estate for IHT purposes. From April 2027, most unused pension funds will be brought into the IHT calculation.

Could this affect you?

Potentially, yes.

The change will be particularly relevant if you:

• have a substantial pension which you do not expect to use completely during your lifetime;
• have deliberately preserved your pension as an inheritance for your children;
• have an estate approaching the IHT thresholds;
• have pension beneficiaries who are different from the beneficiaries of your will;
• are part of an unmarried couple;
• have a blended family; or
• have not reviewed your will or pension nominations for some years.

Including a pension when calculating the estate can have a further consequence. It could push an estate above the £2 million threshold at which the residence nil-rate band begins to be reduced.

Should I start taking money out of my pension?

Not necessarily. The new rules do not mean that everyone should immediately withdraw their pension.

Taking pension benefits can produce an income tax charge, and you need to ensure that you retain enough money to enjoy a secure retirement. What changes is the assumption that preserving the pension should always be the default strategy.

For some clients, taking additional pension income, spending capital or making gifts may now be worth considering. For others, leaving the pension untouched may remain appropriate. Advice needs to look at the whole picture.

Five things to consider now

1. Find your pensions

Make a list of all your pension arrangements, including older schemes from previous employers. Record the providers, approximate values and policy or membership numbers.

2. Check your beneficiaries

When did you last update the nominations or expression-of-wish forms for your pensions?

Your pension nominations, your will and any letter of wishes should be reviewed together so that they all reflect what you currently want to happen.

3. Review your will

The new rules could increase the value of your taxable estate. That may mean a will prepared under the present pension regime no longer produces the best outcome after April 2027.

4. Think about lifetime gifts

If you have more income or capital than you need, making gifts during your lifetime can sometimes reduce the eventual IHT bill.

There are a number of exemptions. One particularly useful exemption can apply to regular gifts made out of surplus income, although careful records and compliance with the relevant conditions are important.

5. Consider how any future tax bill would be paid

Life assurance written into an appropriate trust can sometimes provide funds towards an eventual IHT bill. This should be considered as part of financial and estate planning rather than in isolation.

Don't forget about your executors

There is another reason to get organised.

Under the new regime, executors may have responsibility for reporting and paying IHT relating to pension benefits even though the pension money is controlled by the pension provider rather than the executors themselves.

Executors will therefore need to establish what pensions existed and obtain information from pension providers relatively quickly after death.

Keeping a clear and up-to-date record of your pensions could save your family considerable work at an already difficult time.

How we can help

The important point is not to make changes to your pension simply because of the new IHT rules.  Instead, this is a good opportunity to review your arrangements as a whole.

A coordinated review between your solicitor, tax adviser and financial adviser can consider:

• your existing will;
• your pension arrangements and nominations;
• your likely IHT exposure;
• the residence nil-rate band;
• lifetime gifting;
• provision for a spouse, partner or children;
• trusts and life assurance; and
• how much capital and income you need to retain for your own future.

With the rules due to change on 6 April 2027, clients with significant pension savings should consider reviewing their arrangements in advance rather than waiting until the new regime has begun.

Concerned about how the April 2027 pension changes could affect your family?

Our Private Client team in Sheffield can review your will and wider estate planning alongside your pension arrangements and, where appropriate, work with your financial adviser to identify the steps worth considering before the new rules take effect.