Changes to Inheritance Tax (IHT) on Pensions from 2027

From 6 April 2027, changes to inheritance tax on pensions could affect how your estate is taxed when you die. Currently, most unused pension savings can be passed on tax-free. However, under the new rules taking effect in 2027, unused pensions may be treated as part of your taxable estate. This means your pension could be subject to Inheritance Tax (IHT), potentially increasing the overall tax liability for your beneficiaries.

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Inheritance Tax (IHT) Planning | Pension Changes 2027 | Estate Planning | Reduce your IHT Liability

Understanding Changes to Inheritance Tax (IHT) and Pensions

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.

As a financial advisory firm, we aim to keep you informed about significant changes that may impact your financial planning. Recent announcements regarding Inheritance Tax (IHT) and pensions require your attention, especially as they may affect your estate planning strategies.

Pending key changes to Inheritance Tax (IHT) and Registered Pensions

In the Autumn Budget of 2024, Chancellor Rachel Reeves announced that from 6th April 2027, unused pension savings may be included in your estate for IHT calculations. This change is designed to close a loophole that allowed some individuals to use pensions for inheritance planning rather than retirement income.

What you need to know about 2027 Pension Changes & Inheritance Tax (IHT) Planning

Changes in 2027

These changes are still under discussion and won’t take effect until 6th April 2027.

Nil-Rate Bands

Most estates will not incur additional IHT, as they will remain below the current thresholds. The Nil-Rate Band of £325,000 allows individuals to leave this amount free of IHT and any Residential Nil-Rate Band of £175,000 (if available).

Unused Pensions

If you’ve already accessed your pension savings, these changes may not affect you. However, for those with unused pension funds, this could mean tax implications.

Understanding Unused Pensions & IHT

An unused pension is one that has not been claimed for income, such as through an annuity. This includes savings in your pension pot and those designated for a Flexi Access Drawdown Account (often referred to as ‘FAD’ or ‘Drawdown’). Currently, unused pension savings are typically paid out tax-free to beneficiaries at the Trustee’s discretion.

Current Status of Unused Pensions

Currently, unused pension savings are generally not included in a member’s estate and do not count toward IHT. They are paid out at the Trustee’s discretion, often to family members, and are typically exempt from IHT. However, tax may apply if the member was over 75 at the time of death or if payments exceed the £1,073,100 lump sum and death benefit allowance.

Understanding Inheritance Tax (IHT) Thresholds

Inheritance Tax (IHT) is a tax on the estate of someone who has died, charged at 40% on the value exceeding the tax-free threshold (The government does not plan to change these thresholds before 2030):

£325,000 for most estates.

£500,000 if passing a home to children or grandchildren (when the estate is under £2 million).

Transfers to a spouse or civil partner are exempt from IHT.

Who will be affected by the 2027 Pension Changes?

Not sure if the 2027 changes apply to you? Speak to one of our advisers today to understand how your pension could be impacted by Inheritance Tax (IHT) and Pension changes - and what you can do to plan ahead.

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Estimated 10,500 estates will incur IHT for the first time

Even with these changes, IHT is unlikely to be an issue for most people. Government figures estimate that approximately 10,500 estates will incur IHT for the first time due to the new rules, while about 38,500 estates may face increased IHT liabilities.

The value of your pensions

For homeowners, combining the value of a defined contribution pension with the value of their home could exceed the threshold for passing on assets free of IHT. This situation may result in IHT being owed upon the death of the individual or their spouse.

Review Your Estate & Pensions for Free

As financial advisers, we encourage you to review your estate planning in light of these upcoming changes. Understanding how unused pension savings may affect your IHT obligations is crucial for effective financial management. If you have any questions or need assistance with your financial planning, please don’t hesitate to contact us.

Our service includes a free review of your estate and pensions, which includes our recommendations. If you decide to accept our recommendations a fee may be charged.

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Case Study: IHT & 2027 Pension Changes

Case studies used are fictional and for illustrative purposes only.

Background

Julie, aged 72, passed away with a defined contribution (DC) pension valued at £600,000, alongside other assets totalling £950,000. Julie had intended to leave her pension untouched, believing it to be outside her estate for Inheritance Tax (IHT) purposes, while using her other assets to fund her retirement.

Current Position (Pre April 2027):

Total Estate Value: £950,000 (pension excluded for IHT)

Nil-Rate Band: £325,000.

Taxable Estate: £625,000 (after applying the nil-rate band)

IHT Liability: £250,000 (40% of £625,000)

From April 2027:

With the upcoming changes, Julie's pension will be included in her estate, raising the total value to £1,550,000.

New Taxable Estate Value: £1,225,000 (after applying the nil-rate band)

IHT Liability: £490,000 (40% of £1,225,000)

This case illustrates how the inclusion of pension savings in the estate for IHT calculations can significantly increase the tax liability for beneficiaries. It highlights the importance of reviewing estate planning strategies in light of upcoming changes to inheritance tax legislation.

Common Questions about Inheritance Tax and Pension Changes (Effective April 2027)

Will my pension be subject to Inheritance Tax from 2027?

From 6th April 2027, unused pension savings may be included in your estate for IHT purposes. This could affect how much tax your beneficiaries pay after your death.

What counts as an unused pension for Inheritance Tax?

An unused pension refers to pension savings that have not been accessed for income, such as those in a defined contribution pension pot or drawdown account.

Who is most likely to be affected by the 2027 pension and IHT changes?

Homeowners with substantial pension savings who have not yet drawn from their pension are most at risk of exceeding the IHT threshold under the new rules.

How will the new Inheritance Tax pension rules affect my estate planning?

The changes could increase your estate’s taxable value, especially if you have a large pension pot and property. Reviewing your estate planning strategy before 2027 is essential.

Can I avoid Inheritance Tax on my pension by taking income before 2027?

Taking pension income before the changes take effect may reduce the amount considered for IHT, but the right approach depends on your personal circumstances and financial goals.

The information provided is for informational purposes only and does not constitute financial advice.

Free Inheritance Tax (IHT) Planning Consultation

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