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The following is for information only and should not be considered financial advice. It’s based on our current understanding of taxation law and practice in the UK. Tax rules can change and the impact of taxation, and any tax relief, depends on your personal circumstances and where you live.
Pensions have been treated as separate from a person’s ‘estate’ for inheritance tax (IHT). This has meant pension savings were able to be passed on to loved ones without IHT being charged.
However, from 6 April 2027, the way pensions are treated for IHT is changing – and this could affect families who have never previously had to think about IHT planning.
We asked Shoaib Ahmed, Senior Technical Manager at M&G, for his thoughts on what the changes could mean and what you should be considering now. We recommend speaking to your adviser before taking any action.
What are the new rules?
From 6 April 2027, most unused pensions and death benefits will be included as part of your estate for inheritance tax purposes.
You can continue to pass things on from your estate – including your pension – to your spouse, civil partner or charity, as you can today, and there will be no IHT to pay.
This change may impact people who had planned to leave some pension funds to pass on to their loved ones, while using other assets to fund retirement.
Double tax?
In some cases, your loved ones may also have to pay income tax when they withdraw money from the pension. This would be the case if you were over the age of 75 at death.
This is sometimes referred to as ‘double taxation’, and it’s one of the key reasons why pension planning is becoming increasingly important.
When combined with inheritance tax, it could potentially result in a much higher overall tax bill.
Depending on the income of your loved one:
- A basic‑rate taxpayer could lose over half of the pension value in tax
- Higher and additional‑rate taxpayers could lose around two‑thirds
- The impact will be higher for Scottish taxpayers due to different income tax bands
Pensions are still important for retirement
Even with these changes, it’s important to remember that pensions are still important as they are set up to provide an income for your retirement.
The aim isn’t to rush into decisions purely to reduce tax. Instead, the focus should be on striking the right balance between:
- making sure you have enough income for the rest of your life, and
- planning how any money that’s likely to be left over is passed on.
This is where careful planning – and expert advice – could make a real difference.
Why planning earlier matters
These changes mean that some people could face an IHT issue in their fifties and sixties, but this will likely reduce, or disappear, later in retirement as they spend their wealth.
It’s important, not to gift too much, too soon.
You need to consider how much you’re likely to need throughout retirement, and to identify if there is likely to be any unused funds in your pension fund when you die. Your adviser can help you do this.
If it looks likely that some pension savings won’t be needed, these funds can then be considered for inheritance planning.
What options might be available?
The right approach for you will depend on your own situation, including your health, income needs and family setup.
Tax rules can change and the impact of taxation, and any tax relief, depends on your personal circumstances and where you live.
Here are some of the options to consider:
1. Withdrawing money from your pension earlier
Outside of leaving pension funds to a spouse, civil partner or charity at death, the only way to reduce IHT on unused pension funds is by making withdrawals from your pension which can then be used for more traditional inheritance planning, such as gifting.
2. Gifting during your lifetime
Giving money away can remove it from your estate – but generally, you need to survive seven years for the gift to fall outside IHT completely.
An exemption to consider is gifting using normal expenditure out of income, which would particularly benefit people over the age of 80, as any gifts that qualify under this exemption are not subject to the seven-year rule. However there are strict conditions and as this is quite a complex area we recommend getting financial advice to ensure it’s done correctly.
3. Using trusts
Trusts can be used to reduce inheritance tax. People choose to use trusts when they want to leave property, investments or money for loved ones but keep some control over how the money is spent.
A trust can ensure that the money you leave is used for a certain purpose, for example, school fees or to buy a house.
There are many different types of trusts and complex rules around them which is why we recommend getting help from your adviser.
Once money is gifted into a trust, you’ll no longer be able to access it or use it for your benefit, so it’s important you only give away what you can afford to live without. Your adviser can tell you more about the best options for your particular circumstances.
4. Insuring against inheritance tax
Another option, rather than trying to reduce IHT liability, is to insure against it through a Whole of Life policy written under trust. This could provide a lump sum on death to help pay an IHT bill.
This may work well for some people, but affordability of premiums, health and rigorous medical underwriting requirements need to be carefully considered.
Do you need to take any action now?
There are a couple of things which you should consider in light of the changes coming into effect in April 2027.
- Review and update your inheritance plans – consider whether you may have any unused pension funds.
- Who will get your unused pension savings – review those nominated in your Expression of Wishes, making sure it’s up to date.
A wider family conversation
Talking about inheritance plans with your family isn’t always easy, but these changes may provide a helpful starting point. If you’d like, your adviser can help facilitate open, constructive discussions with children and loved ones. Speaking with your adviser together can help them better understand your situation and how these changes could have an impact. It’s also a great opportunity for them to start thinking about their own retirement and inheritance plans.
Why advice has never been more important
For most people these changes will not affect them. For others, these changes may mean dealing with inheritance tax planning for the first time. And some families may want to rethink their inheritance plans.
Talk to your adviser if you’d like to find out whether or not the new rules will affect you. They can help you:
- Understand how you might be affected
- Balance retirement income with your inheritance plans
- Explore all of your options
- Put a plan in place with confidence
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