Upcoming Changes to Pensions and Inheritance Tax: What You Need to Know
In the latest developments from the UK government, significant changes are on the horizon for how pensions and inheritance tax (IHT) interact. As of 6 April 2027, the rules surrounding pensions and IHT are set to undergo major reforms. These changes will have a substantial impact on estate planning and retirement savings. Below is a closer look at what these changes entail and how they might affect you.
Current Landscape
Until now, pensions have been a tax-efficient way to save and invest, especially when considering passing wealth down to future generations. Pension pots, particularly those in Defined Contribution (DC) schemes, have generally been exempt from IHT. This made pensions a popular choice for estate planning.
This exemption allowed individuals to transfer their unused pension funds to beneficiaries without incurring inheritance tax, providing a helpful tax planning opportunity.
The 2027 Changes
From 6 April 2027, new government rules will include most unused pension pots and specific death benefits in the calculation of an individual’s taxable estate for IHT purposes. Key points include:
Inclusion in Estate
Unused pension pots, along with certain death benefits from both DC and Defined Benefit (DB) schemes, will now form part of an individual’s estate. If your estate exceeds the IHT threshold, any excess, including unused pension pots, will be subject to a 40 percent tax rate.
Exemptions
While most pension death benefits will be included in the estate, some exemptions will remain. Pension death benefits paid to a spouse or civil partner will continue to be exempt from IHT, provided they are UK domiciled. Additionally, dependants’ scheme pensions and charity lump sum death benefits will also be exempt from tax.
Administrative Responsibilities
Pension Scheme Administrators (PSAs) will be responsible for reporting, calculating, and paying any IHT due on these benefits. Trustees will need to work closely with executors or administrators to determine any tax payable.
Impact on Estate Planning
These changes represent a major shift in how pensions are treated for inheritance tax. The current government regards the earlier exemptions as a form of tax avoidance rather than legitimate retirement planning. As a result, they have taken decisive action to include most unused pension assets in the estate for IHT purposes.
For individuals and business owners, this makes it critical to reassess your retirement and estate planning strategies. Some practical steps to consider include:
Review Your Pension
Evaluate your current pension arrangements and consider how the upcoming rules may affect your estate.
Consult with Professionals
Speak with financial advisors and accountants to understand the full implications and to make any necessary adjustments.
Holistic Planning
Adopt a broader view of your estate. Consider what you wish to pass on, what resources you need to retain, and how best to support your loved ones in light of these changes.
Public Response
The announcement has already prompted a notable increase in interest around inheritance planning. Recent surveys show that 54 percent of UK adults intend to alter their retirement or estate planning strategies in response to the changes announced by the government.
Conclusion
The upcoming changes to pensions and inheritance tax are significant and will require thoughtful attention from individuals and business owners. By understanding the reforms and taking action early, you can ensure that your retirement and legacy plans remain effective and in line with your goals.
At Cutts and Co Accountancy, we are dedicated to helping our clients navigate these changes and make confident, informed decisions about their finances. If you have questions or require guidance on how these reforms may affect you, please feel free to get in touch.
In an ever-changing tax environment, staying well-informed and acting early are essential steps in protecting your wealth and passing it on in the most tax-efficient manner possible.
