Major changes are coming to pensions in the next 12 months, when your hard-earned retirement savings could be used as part of the value of your overall estate for inheritance tax (IHT) when you pass away.
The reforms don’t come in until 6 April 2027 and will affect how much you can leave to your loved ones without lumbering them with an inheritance tax bill.
Currently, pension savings are not used for estate valuations when calculating IHT charges when someone dies.
This means money left in a pension can be passed on without worrying about generating a tax bill. But from the new tax year in April 2027, pensions will be included in estate calculations.
This creates a higher chance of pushing the value of an estate above the IHT threshold, currently £325,000. This is made worse by inheritance tax allowances being frozen until April 2031, creating more chances of fiscal drag.
With just over 12 months to go, experts suggest it is worth preparing for the pension changes without panicking - so here are some steps you can take before, and after, the alteration comes into force.
Take your pension income
You can access your pension whenever you want from age 55, with the main options being taking an annuity or staying invested and making withdrawals through drawdown.
It may therefore be worth considering how you access the money after April 2027.
Colin Low, managing director at financial advisory firm Kingsfleet, said: “Perhaps an individual has been drawing on other assets and leaving their pension fund untouched, but it now may be wise planning to draw on the pension income and use the other assets for estate planning arrangements.
“Each client will need to have specific advice on the most suitable combination of arrangements for them and for the level of risk that they are willing to take.”
Gifting
You can pass on wealth to your loved ones while you are alive using gifting allowances.
This helps pass on money or other assets and reduces the value of your estate, while also meaning you get to see your hard-earned wealth being enjoyed.
Up to £3,000 per tax-year can be given as a financial gift to a loved one. There is also a separate £250 allowance per person but it can’t be the same person who gets the £3,000.
Tax-free gifts can be made to your children worth up to £5,000 for a wedding or civil partnership or £2,500 for a grandchild or great grandchild.
More valuable assets can also be passed on and there is no inheritance tax to pay as long as you live for seven years after the gift is made.
Nouran Moustafa, practice principal at Roxton Wealth, said: “For some older clients, gifting can be sensible, but only if it doesn’t compromise their own financial security. Longevity risk is real, and giving away too much too soon can create problems later.”
Increase your pension contributions
Putting more money into your pension can still be beneficial as you will continue getting tax relief - plus most people don’t know when they will die so it also means you are boosting how much money you have for your own golden years.
As an aside, it is worth getting as much money into your pension pot as possible through your workplace pension, before limits on National Insurance relief are introduced (capped at £2,000) from April 2029.
Moustafa added: “Maximising pension contributions may still make sense for those in the accumulation phase, particularly given the income tax benefits, but decisions should be aligned with retirement and legacy goals, not driven purely by tax changes.”
Insurance
If you think your estate will still leave a big inheritance tax bill, even with gifting allowances and after withdrawing some of the money, another option is insurance.
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There are life insurance policies that can provide a payout to cover the cost of inheritance tax.
Ian Dyall, head of estate planning at wealth management firm Evelyn Partners, said: “The cover, written in trust, is designed to match the expected IHT exposure after reliefs and exemptions, and is often used alongside steps to reduce liability, such as lifetime gifting.”
As with any life insurance policy, you would pay the premiums while you are alive and there will be a payout when you die.
Dyall added: “Of course, there are costs involved with a whole‑of‑life policy and arranging a trust, and premiums can be expensive, especially as the life assured ages. It is important that this cost is properly weighed against the IHT benefit, ideally through comprehensive cashflow modelling.
“It can help to think of the whole‑of‑life cover not so much as an insurance policy but as an ‘investment’ for your estate, given that death, the tax bill and the payout are all guaranteed.”
When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
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