The rules of financial planning are constantly evolving, and staying ahead of those changes is crucial for protecting your wealth. A significant shift is on the horizon that could dramatically impact how you pass on your assets.
The government’s recent announcement, and a detail that might have slipped under the radar for many, is set to fundamentally alter the relationship between pensions and inheritance tax (IHT).
What the April 2027 Pension Changes Mean for Your Inheritance
At Brancaster House Financial Planning, we believe in proactive, not reactive, advice. That’s why we’re here to break down the upcoming changes and help you understand what they mean for your financial future and, more importantly, for the legacy you intend to leave. Here’s what the April 2027 pension changes mean for Your Inheritance
The Old Rules: Pensions as an IHT Shield
For years, a pension has been one of the most powerful and tax-efficient tools in the financial planner’s arsenal. Beyond simply providing for your retirement, a key benefit of a pension has been its status as an asset that is generally exempt from inheritance tax.
Under the current system, your pension pot does not count towards the total value of your estate for IHT purposes.
This means that if you have a pension and pass away, the value of that pension can be paid to your named beneficiaries, or a lump sum can be chosen at a trustee’s discretion, without being subject to the standard 40% IHT rate.
It’s a key reason why many people have seen their pension as the ideal vehicle for passing on wealth to their children or grandchildren.
This tax efficiency has allowed individuals to build a substantial nest egg for both retirement and legacy planning, knowing that their hard-earned money would not be significantly eroded by tax.
The Big Change: A Shift in the Sands of Inheritance
All of this is set to change on 6th April 2027.
As confirmed by Chancellor Rachel Reeves in the Autumn 2024 Budget, the rules are being rewritten. From this date onwards, any unused pension funds and certain death benefits will be included in your estate and could be liable for inheritance tax.
Let’s unpack what this means:
Pensions Become Part of Your Estate: The majority of unused pension pots will now be counted as part of your estate for IHT calculations. If the total value of your estate (including this pension value) exceeds the current nil-rate band of £325,000, your beneficiaries could face a 40% IHT bill on the excess.
The Double Tax Hit: Beneficiaries inheriting a pension from someone who dies after 75 now face both income tax at their marginal rate and inheritance tax (IHT), potentially raising the total tax rate to 67% for higher-rate taxpayers. Previously, only income tax applied in these cases, and inheriting the pension pot from those who died before 75 were usually tax-free.
A New Responsibility: The responsibility for reporting and paying the inheritance tax on these funds will fall on the Executors of the Estate, or, where someone has died without a Will, this will be the Administrators of the Estate.
This change is designed to close a perceived loophole and bring pensions more in line with other financial assets for inheritance purposes. However, it requires an immediate re-evaluation of your existing financial plans.
Who is Exempt? A Few Silver Linings
While the new rules are broad, a few key exemptions will apply. These provide some clarity for those planning their estates:
Spouses and Civil Partners: Death benefits paid to a UK-domiciled spouse or civil partner will continue to remain exempt from IHT.
Dependants: Dependants’ scheme pensions will also continue to be exempt.
Charitable Giving: Lump sum death benefits paid to a charity are exempt from both IHT and income tax.
These exemptions mean that strategic planning around who you name as your beneficiary will become more important than ever.
Navigating the Future: Your Next Steps
The April 2027 deadline may seem far away, but for financial planning, it’s a ticking clock. Waiting until the last minute could expose your loved ones to an unnecessary tax burden.
So, what should you do now?
Review Your Existing Pension and Estate Plan: If your current financial strategy relies on your pension as an IHT-exempt asset, it’s time to review it. The plan you put in place years ago may no longer be fit for purpose.
Spend More in Retirement? For some, this change may encourage a different spending pattern in retirement. Rather than leaving a large, tax-exposed pension pot, it may be more sensible to use these funds to enjoy your retirement years to the fullest.
Consider Alternative Strategies: There are still other effective ways to plan your estate.
We can discuss options such as:
Equity Release: Releasing wealth from your property to use or give away tax-efficiently.
Strategic Gifting: Making lifetime gifts to reduce the size of your estate over time.
Life Insurance: Using a life insurance policy written in trust to cover any potential IHT liability.
How We Can Help
Don’t let these changes catch you by surprise. A proactive approach today can make a world of difference tomorrow.
At Brancaster House Financial Planning, our team of independent advisers is here to help you navigate these complex changes. We’ll provide you with a full, holistic review of your current financial situation, helping you understand how these new rules will impact your legacy.
We’ll then work with you to develop a robust, forward-thinking strategy that protects your wealth and ensures your loved ones are financially secure.
Looking for financial advice?
Chat to one of our independent financial advisors for an initial free chat. Book your free session here >
Never miss an !
Enjoyed this post?
Stay inspired and informed by subscribing to our monthly newsletter, the Brancaster Bulletin!
Get market insights, expert financial tips, and the latest updates and event info delivered straight to your inbox.
Sign up here: https://www.brancasterhouse.co.uk/brancaster-bulletin
