Inheritance Tax and Pension Savings: Planning Ahead for April 2027
Inheritance Tax and Pension Savings: Planning Ahead for April 2027
For many years, UK pensions have served a dual purpose: providing long term financial security in retirement and acting as one of the most effective tools for passing on wealth tax efficiently. That landscape is set to shift dramatically from 6 April 2027, when unspent pension savings and pension death benefits will, for the first time, fall fully within the scope of Inheritance Tax( IHT).
What is changing?
Currently, most defined contribution( DC) pensions including Self-Invested Personal Pensions( SIPPs) and personal pensions sit outside an individual’ s estate for IHT purposes because they are typically held under discretionary Trusts. From April 2027, unused pension funds and lump sum death benefits will generally be included in the value of a deceased person’ s estate. This means they could face IHT of up to 40 %. While spousal and charitable exemptions remain, this is still a fundamental shift in how pensions are treated.
For those who die after age 75, the implications are even greater. Beneficiaries could face a double tax charge: IHT at up to 40 % on the value of the pension, followed by income tax when they withdraw the funds.
How might individuals respond?
These changes are already prompting people to rethink how and when they access their pension savings. One option being considered is retiring earlier to draw from pensions sooner, reducing the value left in the estate while benefiting personally during life.
Another is converting part of a pension pot into an annuity. Although not right for everyone, an annuity can provide certainty of income and may reduce the taxable value of remaining pension capital. It can also support“ regular gifts out of surplus income” – an often overlooked IHT exemption that allows individuals to pass on wealth immediately, provided the gifts are well documented.
The importance of early planning
Final legislation is still to come, but the direction of travel is clear. With April 2027 approaching, now is the time to revisit pension, retirement and estate plans holistically. A strategy once focused on preserving pension wealth for heirs may soon require a more balanced, proactive approach.
@ CroweUK @ Crowe _ UK www. crowe. co. uk