Pensions and Inheritance Tax: Planning for the April 2027 Changes
Estate planning can be a complex business
Pensions have long played an important role in estate planning because, unlike most other assets, pension funds have generally fallen outside the scope of inheritance tax (IHT). This is largely because pension death benefits are usually paid at the discretion of pension scheme trustees and do not form part of the deceased's estate.
However, this position is set to change.
Following the Autumn Budget 2024, the government announced that most unused pension funds and pension death benefits will be brought within the scope of inheritance tax from 6th April 2027. This represents a significant change in how pension wealth will be treated on death and could affect the estate planning arrangements of many individuals and families.
At present, pensions are often viewed as an efficient way to pass wealth to future generations because they are generally outside the estate for IHT purposes. From April 2027, most unused pension funds and death benefits will instead be taken into account when calculating the value of an estate for inheritance tax purposes.
Pensions entering the inheritance tax net
Under the proposed reforms, the value of most unused pension savings will be included when determining whether an estate exceeds the available inheritance tax thresholds.
Where the value of an estate exceeds those thresholds, inheritance tax may be charged at up to 40 percent on the excess, including the value of unused pension funds.
As a result, individuals with substantial pension savings may wish to review their estate planning to ensure it continues to achieve their intended objectives.
Which pensions are affected?
The changes are expected to apply to most registered pension schemes, including:
Personal pensions
Workplace defined contribution schemes
Self-Invested Personal Pensions (SIPPs)
Small Self-Administered Schemes (SSAS)
For many individuals, pension savings represent one of their most valuable assets, particularly where contributions have accumulated over many years.
The government has confirmed, however, that death-in-service benefits paid to family members from a registered pension scheme will remain outside the scope of inheritance tax.
Additional considerations for SIPPs and SSASs
The reforms may have particular significance for individuals whose pension arrangements hold substantial underlying assets.
SIPPs and SSASs are often used to hold investments such as:
Commercial property
Private company shares
Other long-term investments
Where these assets have increased significantly in value, bringing them within the inheritance tax calculation could increase both the potential tax liability and the complexity of estate administration.
Anyone with significant SIPP or SSAS assets should consider how these arrangements fit within their wider estate planning strategy.
Implications for executors
The changes are also expected to create additional responsibilities for personal representatives administering an estate.
From April 2027, executors may need to work closely with pension scheme administrators to establish the value of pension benefits and ensure any inheritance tax liability is properly reported and paid.
In some circumstances, pension providers may be asked to retain part of the death benefits to meet any inheritance tax due before the balance is distributed to beneficiaries.
Interaction with income tax
Pension death benefits can already be subject to income tax depending on the age of the pension holder when they die.
Under the current rules:
If death occurs before age 75, beneficiaries can generally receive pension benefits free of income tax.
If death occurs after age 75, withdrawals are usually taxed at the beneficiary's marginal rate of income tax.
The introduction of inheritance tax from April 2027 means that, in some situations, pension wealth could potentially be exposed to both inheritance tax and income tax, depending on how benefits are structured and withdrawn.
Death benefits and pension nominations
Despite the proposed reforms, pension nomination forms, often known as Expression of Wishes forms, will remain an important part of pension planning.
These forms allow pension holders to indicate who they would like to receive their pension death benefits. Although not legally binding, trustees will usually take them into account when deciding how benefits should be distributed.
It remains important to review nomination forms regularly, particularly following major life events such as marriage, divorce or the birth of children, and to ensure they remain consistent with your Will and wider estate planning arrangements.
Three steps to consider before April 2027
If you have significant pension savings, it may be worth reviewing your arrangements now.
Review your pension nominations
Ensure your nomination forms are up to date and reflect your current wishes.
Consider pensions as part of your overall estate
Review how pension savings sit alongside property, investments and business assets in light of the proposed changes.
Seek coordinated legal and financial advice
Decisions about pensions, investments and gifting can have significant tax implications. Taking legal and financial advice can help ensure your plans remain aligned with your long-term objectives.
How we can help
Our Private Client team advises individuals and families on inheritance tax planning, estate planning and succession matters.
Inheritance Tax Planning Solicitors can help by reviewing the potential impact of the 2027 changes, advising on Wills and succession planning, working alongside financial advisers and helping ensure your arrangements remain appropriate as tax rules evolve.
