For a long time, pensions have offered people a tax-efficient way to pass on wealth to the next generation.
Under current rules, most defined-contribution pensions sit outside of your estate for the purposes of calculating any Inheritance Tax (IHT) due.
If the death occurs prior to the age of 75, this can mean that pension death benefits are passed on entirely free from IHT. If the death occurs after the age of 75, the benefit will be subject to Income Tax.
What changes are coming to IHT?
From 6 April 2027, unused pension funds and death benefits will, in most cases, be included in the value of your estate for IHT.
These assets will become liable to an IHT charge of up to 40 per cent, depending on the size of your estate and any available allowances.
The exemption that currently allows pensions to be passed to children and other beneficiaries without tax will largely disappear, remaining only when passed to a surviving spouse or civil partner.
It is also important to note that the reform applies irrespective of your residency. British expatriates living in countries such as Portugal, Spain, France, Cyprus, Malta, or elsewhere will not be exempt from these changes.
With the current IHT thresholds frozen until at least 2030, more families will be drawn into the IHT net as asset values rise with inflation.
What can you do now?
Early action and proactive planning, whilst not always a priority, can help to significantly reduce your tax exposure and spare your family from administrative delays later.
Ahead of the changes, you may wish to:
- Review your pension value as part of your full estate, to understand the impact these changes are likely to have.
- Revisit your beneficiary nominations. Leaving pensions to a spouse/civil partner can retain IHT protection.
- Review your plans for utilising your pension during retirement and consider whether this is still the most tax-efficient option.
- Seek advice on how best to structure your assets if your estate is approaching, or is likely to exceed, the IHT threshold as a result of the changes.
Pensions containing property or illiquid investments may also require careful planning to avoid rushed asset sales.
Speak to our tax specialists today about how the IHT reforms will impact your estate, and to make sure your affairs are structured with tax efficiency in mind.
