Pensions have long been considered a tax-efficient means of investing for your future, offering Income Tax relief and allowing for any unused value to pass free of Inheritance Tax (IHT) on your death. The IHT benefits of pension savings are set to be removed from April 2027.

In the 2024 Autumn Budget, the Chancellor announced plans to bring the value of your pension savings, remaining unused at death, within the scope of inheritance tax with effect from 6 April 2027.

Under the existing legislation it is likely that your pensions will be fully outside of the scope of IHT. As a result, the advice has often been to draw income from other sources in your lifetime, before drawing from pensions, so that these can be left free from inheritance tax.

Why the need for new legislation?

The proposed changes may make it more attractive to draw from pensions ahead of certain other sources, as pensions could be subject to a double tax charge: IHT of 40% your death, and income tax (if you die over age 75) when funds are subsequently withdrawn by those who inherit the funds. A double tax charge would lead to a very high effective tax rate on the pension funds of up to 67%.

In some cases, under the existing rules, it is recommended that the pension savings may be used to pass wealth to parties other than your spouse - such as your children or other descendants - on the first death of either spouse, due to the fact this allows for wealth to pass free of IHT. Any transfers to your spouse are free of IHT already, so other assets may be used to provide for them under the current rules. Pensions are not dealt with in your Will, but rather by the nominations you put in place with the pension provider. Thought therefore needs to be given to your existing nominations, both in the meantime and once the changes take effect. For example, under the new rules you may wish for the nomination to be in favour of your spouse.

Another important factor is that, once the changes take effect, your pension savings will also be taken into account for the purposes of the tapering of the residence nil-rate band (RNRB), as outlined in our article Minimising inheritance tax using the Residential Nil Rate Band. This tapering applies as a £1 reduction to the £175,000 RNRB for every £2 your estate exceeds £2 million. Larger estates will likely not be affected if they are fully beyond the tapering threshold prior to the inclusion of the pension funds.

How we can help

As the changes may impact any previous advice you have received, now is a good time to revisit this and consider if there is any alternative planning that should perhaps now be considered. This is particularly relevant when considering the impact of drawing from the pension sooner than planned and the possibility of accelerating lifetime gifting. As an example, any outright gift is a Potentially Exempt Transfer (PET), which must be survived by 7 years, in order to escape the IHT net. Alternatively you may be able to consider making use of some of the immediate exemptions outlined in our article Approaching retirement? Reduce your Inheritance Tax bill such as the exemption for gifts out of income, provided all relevant conditions are satisfied.

It is of course important to consider not only the tax impact of any such actions, but also to look at these in the context of your wider financial planning strategy, spending requirements and aims for providing funds to your beneficiaries.

Get in touch

If you have a pension pot of significant value, these new rules will likely have a sizeable impact on your inheritance tax exposure. We would be happy to discuss your individual circumstances and estate planning aims to advise on a solution which meets your requirements, as ultimately there is no one size fits all solution and bespoke advice will add the most value to you.

We can work with your financial planner or indeed alongside our own financial planning team to provide joined up tax and financial planning advice in respect of your pensions.