For many years, pensions have quietly been one of the most effective ways to pass wealth down the generations.
A lot of retirement plans were built around a simple principle: use ISAs and other investments first, preserve the pension for later life, and potentially leave it to children in a tax-efficient way.
The government has now announced plans to bring most unused pension funds and certain pension death benefits into the inheritance tax (IHT) calculation from 6 April 2027. As things stand, this would mean pension funds could form part of your taxable estate for IHT purposes.
As with any proposed tax change, the detail may evolve before implementation. However, if introduced as outlined, this would represent a significant shift in estate planning.
The current standard rate of inheritance tax is 40% on the value of an estate above available thresholds. For some families, including pension funds within that calculation could materially change long-term plans.
I’ve recently reviewed this with a couple in their early seventies who had accumulated substantial pension funds alongside property and other investments. Their intention was sensible and well thought through: enjoy retirement comfortably and leave the majority of their pension to their children.
Under the proposed rules, a significant portion of that pension could potentially become subject to inheritance tax. There was no panic — but there was surprise.
That is often the pattern. These changes do not demand rash decisions. They demand thoughtful review.
For years, pension planning and inheritance tax planning worked neatly together. Pensions were typically outside the estate for IHT purposes, tax-efficient during life, and flexible on death. If pensions become part of the estate calculation, the order in which we draw assets in retirement may need to shift.
For some clients, that may mean drawing pension income earlier than originally planned. For others, it may involve increasing gifting strategies, making better use of surplus income rules, or rebalancing which assets are preserved for legacy.
There is no universal answer.
What concerns me slightly is how quickly headlines could lead people to assume they now need to “do something” dramatic — withdraw large sums, restructure everything, or rush into gifting.
Good financial planning rarely comes from reacting to a single article.
It comes from understanding your numbers, your income needs, your health, your family structure and your long-term objectives — and then adjusting accordingly.
This is a conversation I am increasingly having with families in and around Reigate, particularly those whose pensions have grown significantly over the past decade. Many plans were built under one set of assumptions. The rules are evolving. The plan should evolve with them.
The real value of advice here is not in knowing that a rule might change. It is in understanding what that change actually means for you — and whether action is required at all.
If you are unsure whether these proposed changes affect your retirement or inheritance tax position, it may simply be worth a structured review.
You are very welcome to contact me for a free no obligation chat to explore whether your current plan still does what you want it to.
