LAW
Next year pensions will be hit with Inheritance Tax. Are you prepared?
AARON SPENCER, PARTNER AND HEAD OF THE PRIVATE CLIENT TEAM AT FURLEY PAGE, EXPLAINS WHAT THE CHANGES MEAN FOR YOUR ESTATE.
For anyone who thinks that estate planning is a complex business, long-anticipated reforms to the Inheritance Tax( IHT) treatment of pensions, due to come into force from 6 April 2027, will make effective planning even more pressing.
Pensions have long played an important role in prudent estate planning, because unlike most other assets, pension funds have generally fallen outside the scope of IHT. Currently, death benefits are typically paid at the discretion of pension scheme trustees rather than forming part of the deceased’ s estate.
In the raft of new taxes and regulations announced at the Autumn Budget in 2024( and confirmed in the Finance Act 2026), that is set to change. The new IHT treatment of pensions represents a fundamental shift in UK estate planning, with the stated intention to curb the use of pensions as a vehicle for tax-free wealth transfer.
From next April, most unused pension funds and pension death benefits will be brought within the scope of inheritance.
What impact will the changes have?
Rather than being an efficient way to pass wealth to the next generation, pension wealth will now be treated as part of the deceased’ s taxable estate and will be liable to incur IHT at up to 40 %.
The change applies to unused defined contribution pots and most lump-sum death benefits, although existing reliefs( most notably the spousal exemption) will continue to apply.
What type of pensions are included?
The reforms will apply broadly across most registered pension schemes, including:
• Personal pensions
• Workplace defined contribution schemes
• Self-invested personal pensions( SIPPs)
• Small self-administered schemes( SSAS)
What impact does this have on executors?
The role of executor will become more onerous, as they will be responsible for reporting and paying any inheritance tax due on unused pension funds and pension death benefits.
Executors will need to liaise closely with pension scheme administrators to establish the value of pension benefits and to ensure that the appropriate tax is accounted for during the administration of the estate.
What should people concerned about the changes do?
Individuals with significant pension savings should consider the following three areas:
Review your pension nomination forms- ensuring that nominations are up to date can help pension trustees understand who you intend to benefit and how benefits should be distributed.
Review your will- this is an important time to review your will( or make one if you haven’ t already) and make sure you understand your potential IHT exposure and steps that can be taken to mitigate IHT. You should consider whether your appointed executors will need professional support and weigh up the merits of appointing a professional executor to navigate the increasingly complex reporting requirements.
Consider how pensions fit within your overall estate- if pension funds are brought within the scope of inheritance tax, it is sensible to review how pension savings sit alongside other assets such as property, investments and business interests.
Seek coordinated legal and financial advice- decisions about drawing pension income, restructuring investments or making lifetime gifts can have complex tax consequences. Taking advice from both legal and financial advisers can help ensure that any changes support your long-term succession and tax planning objectives.
Please get in touch on 01227 763939, or at info @ furleypage. co. uk for more information.
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