From 6 April 2027, most unused pension funds will be brought into the value of an estate for inheritance tax purposes. But that does not mean every pension suddenly gets hit with a forty per cent tax bill. Here is what the change actually means.
If you have spent years building a pension, there is a fair chance you have also wondered what happens to it when you die.
For a long time, pensions have often sat outside the estate for inheritance tax purposes, which made them an important part of estate planning.
That is changing.
From 6 April 2027, most unused pension funds and pension death benefits will be brought into the value of an estate for inheritance tax purposes.
That sounds dramatic, and for some families it will matter.
But it does not mean every pension suddenly gets hit with a forty per cent tax bill.
This is exactly the sort of headline that can make people panic and start moving money before they have worked out what the change actually means for them.
I would rather start with the boring but useful bit.
Understand what you own, understand who is likely to inherit it, then work out whether there is actually a problem to solve.
What is changing with inheritance tax on pensions?
Under the rules taking effect from 6 April 2027, most unused pension funds and pension death benefits will be included when the value of an estate is assessed for inheritance tax.
That matters because pensions have traditionally been treated differently from many other assets.
A house, savings and investments may already form part of an estate.
A pension has often been able to pass to beneficiaries outside the estate, depending on the type of scheme and how the benefits are paid.
The change means families may need to look at pensions as part of the wider estate rather than treating them as a separate pot that can simply be ignored.
If you want to understand what can happen to a pension after death before getting into the tax side of it, our Knowledge Hub guide What Happens to My Private Pension When I Die? is a useful place to start.
Does that mean my family will definitely pay inheritance tax on my pension?
No.
This is where the headline and the reality can be two very different things.
Inheritance tax is normally charged at forty per cent on the part of an estate above the available allowances, after taking account of exemptions and reliefs.
The standard nil rate band is currently £325,000.
There is also a residence nil rate band of up to £175,000 where the qualifying conditions are met.
Unused allowances can sometimes transfer between spouses or civil partners.
That means a qualifying married couple or civil partnership can, in some circumstances, pass on up to £1 million before inheritance tax becomes payable.
It is not a blanket £1 million allowance for everybody, and the residence allowance can reduce for larger estates, so the detail matters.
The Government has said that more than ninety per cent of UK estates are expected to continue to have no inheritance tax liability after the pension changes.
So for many people, the change may alter the calculation without creating an actual tax bill.
Why should pension holders in Peterborough review this now?
Because your pension rarely sits in isolation.
I speak to people in and around Peterborough who have built wealth in several different places.
They may have a workplace pension, an older personal pension, ISAs, savings, a home that has increased in value and perhaps a second property or business interest.
None of those numbers looks particularly frightening on its own.
Put them all together and the picture can change quite quickly.
That is why an inheritance tax conversation should not begin with a product.
It should begin with a simple question.
What does your total financial position actually look like?
For somebody with a modest pension and a home, there may be little or no inheritance tax issue.
For somebody with a larger pension, valuable property and significant investments, the 2027 change may be much more relevant.
Should I start taking money out of my pension because of the new rules?
Not just because you have read a headline about inheritance tax.
Taking money from a pension can create other tax consequences.
It can change the amount of income tax you pay.
It can affect how much money remains invested for retirement.
Depending on how benefits are taken, it can also affect future pension contribution allowances.
So withdrawing money purely to avoid one possible future tax can sometimes create another problem today.
Tax planning works best when you look at the whole picture rather than trying to beat one tax in isolation.
There may be sensible reasons to change how you use your pension, your ISA, your cash or other assets.
There may also be a very good reason to do absolutely nothing.
The correct answer depends on your circumstances.
For a wider explanation of how pension withdrawals themselves can be taxed, you can also read How Is My Pension Taxed When I Retire? in the Knowledge Hub.
What should I review before April 2027?
Start with the basics.
Find out what pensions you actually have and what they are worth.
Check the type of pension, the current beneficiaries or expression of wishes, and whether the provider has your up to date details.
Then look at the pension alongside the rest of your estate.
Property, savings, investments and other assets all matter.
If you are married or in a civil partnership, the position of both people should normally be considered together.
It is also worth thinking about what you actually want your money to do.
Do you want to maximise your own retirement income?
Leave money to children or grandchildren?
Help family while you are still alive?
Keep a larger emergency reserve?
Those goals can lead to very different planning decisions.
The important bit is not to panic
Inheritance tax on pensions is a real change, and for some families it will be important.
But changing a financial plan purely because a rule changes can be just as dangerous as ignoring the rule completely.
Your pension was built first and foremost to fund your retirement.
Estate planning matters, but so does making sure you have enough money to live the life you actually want.
If you are looking for a financial adviser in Peterborough and you are unsure how the inheritance tax changes could affect your pension or wider estate, start by getting the numbers together.
Once you can see the whole picture, the conversation becomes much easier.
Still got a question about your pension and inheritance tax?
Ask me.
That is what I am here for.
Steve Ralph
Financial Adviser