Pension and Inheritance Tax Changes: What They Could Mean For You

From 6 April 2027, unused pension funds and death benefits may be included in the value of your estate for inheritance tax purposes. This is an important change and could affect how many families plan to pass on wealth to the next generation.

Until now, pensions have often been seen as a valuable way to pass on money tax-efficiently. Under the new rules, unused defined contribution pensions will usually form part of the estate on death, which means they may now attract inheritance tax.

What Is Changing — and What Is Still Exempt

The new rules will apply to most defined contribution pension savings, but some important exemptions remain.

• Likely to be included: Most unused pension funds and pension death benefits.
• Still outside the rules: Death in service benefits and Dependants’ scheme pensions.
• Spouses and civil partners: Pension wealth left to a spouse or civil partner will usually remain exempt on the first death.

What This Could Mean for Personal Representatives

Personal Representatives will have more work to deal with under the new system where the deceased leaves unused pension funds, as they will need to gather pension valuations and deal with any inheritance tax reporting before the estate can be finalised.

Personal Representatives will need to serve pension providers with a withholding notice to ensure that the pension provider hold back sufficient funds to settle the inheritance tax liability arising on the pension.

Why It Is Worth Reviewing Your Estate Plan Now

With inheritance tax thresholds frozen until 2030, more families may find themselves affected. This means pension planning should now be looked at alongside the rest of your estate planning, rather than in isolation.

There are still several planning options worth discussing.

One approach is strategic drawdown, where pension wealth is used earlier in retirement, although this can bring higher income tax in the short term. Financial advice should be sought.

Another alternative is gifting, such as using the £3,000 annual exemption or making potentially exempt transfers.

A further option is life insurance, where a life policy is written in trust so that the payout can help cover any expected inheritance tax liability.

With April 2027 approaching, this is a good time to review your wider estate plan with professional advisers, so you can understand your options and put the right structure in place for your family.

Disclaimer: The details above are for informational purposes only. It is crucial to seek professional advice from a private client and tax specialist.

For more information, please contact Joanna Ensor, based in our Marlow office at joanna.ensor@theburnsidepartnership.com.