For many people, pensions have become one of their largest financial assets. Over the past decade, they have also become an increasingly valuable estate planning tool, with many retirees choosing to spend other assets first and preserve their pension for future generations.
From 6 April 2027, that approach may no longer be appropriate.
The Government will bring most unused pension funds and pension death benefits within the scope of Inheritance Tax (IHT). William Godsave, Head of Financial Planning at Credo Wealth, explains how the reforms could affect families and why their impact will depend on individual circumstances. As one of the most significant developments in estate planning for many years, the changes provide a timely opportunity to assess whether existing retirement and succession plans remain fit for purpose.
What are the 2027 Pension Inheritance Tax changes?
Historically, unused pension funds have generally sat outside an individual’s estate for IHT purposes. As a result, many people have deliberately drawn income from ISAs, General Investment Accounts or cash savings during retirement, allowing their pension to continue growing and, where possible, pass tax-efficiently to their beneficiaries.
From April 2027, this position changes. Most unused pension funds, across both defined contribution and defined benefit arrangements, and certain pension death benefits will be included when calculating the value of an estate for IHT purposes, regardless of whether scheme trustees or administrators retain discretion over payment. The reforms also place new reporting responsibilities on executors, who will be responsible for calculating and paying any IHT due, making estate administration more complex than under the current rules.
Some benefits remain outside the new regime. Death-in-service benefits paid from a registered pension scheme are excluded, and the existing exemptions for pension death benefits passing to a surviving spouse or civil partner, or to a registered charity, will be maintained. Even so, the changes are expected to affect a meaningful share of families with accumulated pension wealth: the Government estimates around 10,500 of the roughly 213,000 estates with pension assets will face an additional IHT charge each year once the rules take effect.
How will the new pension Inheritance Tax rules affect families?
Consider a couple who have spent many years building their retirement savings.
Alongside their home and investments, one spouse has accumulated a pension worth £700,000. Under the current rules, that pension would generally sit outside their estate when calculating any IHT liability.
From April 2027, the position depends on who inherits it. If the pension passes to the surviving spouse, it remains exempt under the existing spousal exemption. But if it is left to children or other non-exempt beneficiaries, the unused pension would instead form part of the taxable estate. Depending on the value of their other assets and the reliefs available, this could substantially increase the amount of IHT payable.
Where the pension is inherited following death after age 75, beneficiaries may also pay Income Tax as they withdraw funds from the pension. The interaction of these two taxes means that decisions around how, when, and to whom pension wealth passes have become considerably more important than they were previously.
Should you change your retirement strategy before 2027?
In short, no.
One of the dangers with any major legislative change is assuming there is a single “correct” response.
Some individuals may benefit from drawing more from their pension during retirement, preserving other assets instead. Others may still find that leaving funds invested within their pension remains the better long-term outcome, particularly where flexibility, investment growth and income needs are considered.
The right strategy will depend on a range of factors, including:
- the value of the wider estate
- anticipated retirement spending
- existing sources of income
- family circumstances and intended beneficiaries
- potential future Income Tax liabilities
- broader succession planning objectives
Rather than considering pensions in isolation, these decisions should form part of an integrated financial plan.
Estate planning steps to consider before April 2027
Although the new rules are not due to take effect until April 2027, there is still time to review existing arrangements.
For many families, this review could include:
- reassessing which assets should be used to fund retirement expenditure
- reviewing beneficiary nominations alongside Wills and wider estate planning arrangements, particularly given the ongoing distinction in treatment between spouses/civil partners and unmarried partners
- considering whether lifetime gifting remains appropriate and affordable
- modelling future cashflow to understand how much wealth is likely to be needed during retirement
- ensuring investment portfolios, pensions and other assets are working together as efficiently as possible
Importantly, these decisions should not be driven solely by tax. A strategy that reduces a future tax liability but compromises financial security during retirement is unlikely to be the right outcome.
Long-term estate planning after the pension tax changes
The forthcoming pension changes reinforce a broader point: estate planning is no longer something to consider only later in life.
Retirement planning, tax planning and succession planning have become increasingly interconnected. Decisions made today around pensions, investments and withdrawals can have a significant impact not only on an individual’s own retirement, but also on the wealth ultimately passed to future generations.
For those with substantial pension assets, April 2027 provides a natural point to review existing arrangements. In many cases, only modest adjustments may be required. In others, the changes may justify a more fundamental reassessment of how retirement wealth is structured.
How PKF can help
As with most areas of financial planning, the best outcomes are rarely achieved by reacting to legislative change alone. Instead, they come from taking a holistic view of wealth, understanding the available options, and ensuring each decision supports both current retirement objectives and long-term family goals.
Our Private Client and Wealth Management specialists work closely with individuals and families to review how pensions, investments and other assets fit within their wider retirement and estate plans. By modelling different options and considering both current financial needs and long-term succession objectives, we can help clients understand the potential impact of the April 2027 changes and make informed decisions about protecting and passing on their wealth.
Important Notice
This marketing material has been prepared and issued in the United Kingdom by Credo Capital Limited (“Credo”). It is provided to you for discussion purposes only and does not constitute and should not be interpreted as either investment advice (including legal, tax or accounting advice) or a trading recommendation. This marketing material is not a solicitation to buy or sell any financial instruments or commodities, a recommendation to participate in a particular trading strategy or to invest into regulated or unregulated funds. The value of an investment can fall as well as rise and is not guaranteed, your capital may be at risk and you may not receive back your original investment in full.
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