While other assets often fall within the scope of inheritance tax, pension funds have generally sat outside an individual’s estate. This has led many people to preserve their pension pots where possible, using other assets first and viewing their pension as an efficient way of passing wealth to future generations.
From April 2027, that position will change.
What is changing?
Under the new rules, unused pension funds will become subject to inheritance tax.
In simple terms, assets that have traditionally fallen outside an estate will be brought into the inheritance tax calculation.
For many families, this could significantly increase the value of their taxable estate overnight.
Why does it matter?
The impact is likely to extend far beyond those who would consider themselves wealthy.
A pension fund built up over decades can represent a substantial asset. Once added to the value of a home, investments and other savings, some estates may find themselves facing inheritance tax for the first time.
Others may discover that their inheritance tax exposure is far greater than expected.
The changes may also have knock-on effects. Bringing pension wealth into an estate could impact the availability of valuable inheritance tax allowances (see The inheritance tax trap | Lovewell Blake).
A shift in planning
For many years, a common planning approach was to preserve pension assets and spend other wealth first.
Once the new rules take effect, that approach may no longer be the most tax efficient option. For some taxpayers, retaining pension funds could become less effective, prompting a review of which assets are best passed on to future generations.
At the same time, inheritance tax is only part of the picture. Pensions will continue to benefit from valuable income tax advantages, including tax relief on contributions and tax-efficient investment growth. For many people, they will remain one of the most attractive long-term savings vehicles available.
The question is therefore not whether pensions are still worthwhile, but whether existing plans remain appropriate in light of the new rules.
Don’t overlook beneficiary options
The April 2027 changes have understandably focused attention on inheritance tax, but it is equally important to review how pension death benefits are structured.
Many modern pension schemes allow beneficiaries to inherit pension funds through beneficiary drawdown, enabling funds to remain within a pension wrapper and providing flexibility over when benefits are accessed.
However, not all pension arrangements offer the same options. Some older schemes may only provide lump sum death benefits or more restrictive arrangements for beneficiaries.
As part of any pension review, it is worth ensuring that beneficiaries will have access to flexi-access drawdown and the widest possible range of options
Key takeaway
The April 2027 changes represent one of the most significant developments in inheritance tax legislation for many years.
For those with substantial pension wealth, the question is no longer simply how much is held in a pension, but how that pension fits into the overall value of the estate and the wider family succession plan.
With the new rules now legislated, it is a sensible time to review existing arrangements, understand the potential impact on your estate and ensure that your pension remains aligned with your long-term objectives.