What’s Changing?
Currently, most pensions in the UK (such as defined contribution pensions) sit outside of your estate for inheritance tax (IHT) purposes. This means that your beneficiaries can usually inherit your pension tax-free if you pass away before age 75, or at their marginal income tax rate if you die after 75 — but without facing a 40% inheritance tax.
However, from April 2027, the UK government has signalled a change that may treat unused pension funds as part of your taxable estate. If this proceeds as proposed, it could mean:
- Your pension may become subject to 40% inheritance tax if your estate exceeds the IHT threshold (currently £325,000 per person, or up to £500,000 if you leave your home to children or other direct descendants).
- The tax efficiency of passing down pension wealth may be reduced.
Why This Matters to You
Many clients use pensions as a flexible way to support heirs, thanks to their current IHT advantages. If pensions become part of the estate:
- It may be more efficient to spend from pensions first, rather than other assets like ISAs.
- Estate planning strategies may need to be reviewed to reduce your family’s future tax burden.
- Trust planning and the timing of pension withdrawals may need adjusting.
What Should You Do?
Understand your current pension and estate planning strategy well before 2027. We’re here to help you:
- Evaluate how this potential change affects your personal situation.
- Explore tax-efficient withdrawal strategies.
- Consider alternatives such as gifting or trust-based planning.
Grant
Director and Independent Financial Adviser
This article is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
Levels and bases of, and reliefs from, taxation are subject to change and their value will depend upon personal circumstances. Taxation and pension legislation may change in the future.
The Financial Conduct Authority (FCA) does not regulate Inheritance Tax Planning, Tax or Trust Advice.
