Stuart Maher, Director and Solicitor at Watson Ramsbottom reveals how you can plan for the 2027 inheritance tax changes on pensions
From April 6, 2027, most unused pension funds and many pension death benefits will be treated as part of your estate for inheritance tax (IHT) purposes. At present, untouched pensions can often be passed outside the estate altogether, which has made them a popular tool for passing wealth down the generations. That favourable treatment is set to narrow significantly.
Not all pensions are affected. Death in service lump sums from occupational schemes, and dependant's scheme pensions from defined benefit or collective money purchase arrangements, are expected to remain outside the estate for IHT, so it is important to understand which of your arrangements fall within the new regime.
As a result, existing wills should be reviewed. Gifts of ‘my pension’ or of specific pension death benefits may no longer be appropriate where IHT is now in point. You may wish instead to direct other assets to particular beneficiaries or build in flexibility so your executors can take account of the eventual tax position in 2027 and beyond.
The change also has implications for family trust structures. Discretionary will trusts or family settlements that were designed on the basis that pensions would usually escape IHT may now face a higher tax burden when receiving pension death benefits. Trustees should revisit their letters of wishes, distribution policies and, where possible, trust powers, to ensure that future pension payments can still be managed tax efficiently.
Pension death benefit nominations ought to be checked carefully. Where nominations currently favour adult children or bypass a surviving spouse or civil partner, it may now be more efficient for funds to be paid to the survivor first, and then cascaded on, depending on the family's wider IHT position.
Life assurance remains a useful way of funding any additional IHT created by these reforms. Policies are typically written into trust so that the pay out falls outside the taxable estate and is readily available to meet the tax due.
Additionally, drawdown and wider lifetime planning should be reconsidered. If your marginal income tax rate is lower than the 40 per cent IHT rate, it may be preferable to draw modestly more from pensions, accept the income tax charge, and then make lifetime gifts. Regular gifts made out of surplus income can be immediately outside your estate for IHT, provided the statutory conditions are met, and can be a powerful tool alongside these new rules.
Address: Watson Ramsbottom Solicitors, 18A-20 Queen Street, Great Harwood, Lancashire, BB6 7QQ
Tel: 01254 672222
Web: watsonramsbottom.com
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