6 minute read
From April 2027, the government plans to bring most unused pension funds within the scope of inheritance tax (IHT), subject to final legislation.
According to the UK Government, the intention is to make the inheritance tax system fairer and more sustainable, while supporting public finances.
Andrew Smith, one of our independent financial advisers, says: “This is one of the most significant changes in inheritance tax since the ‘7-year rule’ was introduced by Margaret Thatcher in the 1980s.”
Pensions have typically been treated differently from the rest of your estate, and this change may represent a shift in how you pass your wealth on. With time still on your side, now could be a good time to review how your pension fits alongside the rest of your estate.
Why the change may matter
While your pension is there to support your income later in life, you may also see it as something you could pass on. Bringing pensions into that inheritance framework could change how you think about the role yours plays within your wider plans.
Andrew says: “This does not change the core purpose of pensions. They remain one of the most tax-efficient ways to build long term savings. However, the way they sit alongside other assets such as property, investments, or cash may start to look different when you view everything together.”
This overhaul is also happening at a time when pension wealth has grown.
Andrew adds: “We are seeing clients contributing more to their pensions. This is partly because defined benefit pensions, which provide a guaranteed income for life, have become much less common. Many people also recognise that the state pension alone may not support the lifestyle they want in retirement.”
Automatic enrolment, higher contributions, and the growth of pension investments have meant that your pension could now make up a significant part of your overall wealth. It might even be one of your largest assets, alongside your home.
What you might want to review now
Although legislation is still to be finalised, the implementation date is fast approaching, and now may be a good time to pause and take stock of your plans.
Andrew advises that a helpful first step is building a clearer picture of how your assets work together, and how they are currently being used. This can include a calculation to understand whether there is a liability now, and how that position may change once pensions are included. If you want to see how this might look in practice, our IHT calculator can help bring it to life.
Taking a closer look at how you are using your pension
As part of that review, you may find your pension plays a bigger role in your estate plan than you first thought. As a result of this, you might also want to reevaluate how you draw on different income sources in your retirement.
“In the past, pensions were often used last to ensure that there was something to pass on free of inheritance tax. We’re seeing that position starting to be reconsidered, depending on the wider financial picture,” Andrew says.
This does not necessarily mean changing course straight away. It is about recognising how your pension sits alongside your other assets, and whether your current approach still reflects what you want to achieve.
Seeing how everything connects
Your pension, property, investments, and savings all behave differently over time. However, it’s not always obvious how much of your wealth may be concentrated in one area, or how these different income sources interact.
Looking at everything together can give you a clearer sense of balance and help you think about how each might be used over time.
This could also mean a change in your strategy, taking into account how different assets are used over time, particularly when thinking about long-term outcomes for both retirement and legacy.
A practical sense check
If you are starting to revisit your plans, it may help to ask yourself a few questions:
- How much of your overall wealth sits within your pension?
- Have you been treating your pension mainly as a legacy asset rather than a source of income?
- Do your beneficiary nominations still reflect your current circumstances?
- Do you have a clear view of how and when you might draw on different assets?
- How easy is it to see your full financial picture in one place?
This reform does not change the core role of pensions. They remain one of the most effective ways to build long term savings and support your income in retirement.
But as the way pensions are treated begins to shift, it may prompt a different way of thinking about how your retirement and legacy plans come together.
As Andrew says: “One of the risks is focusing on inheritance tax at the expense of ensuring long term financial security.”
With the time you have before the new approach comes into effect in April 2027, you may simply want to step back and look again at how everything connects.
Ultimately, that clarity can help boost your confidence in your financial plan as you navigate through the upcoming changes.
Please note:
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term (minimum of 5 years) and should fit in with your overall risk profile and financial circumstances.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or Will writing.