Preparing for the 2027 pension inheritance tax changes

However, if your retirement or inheritance plans were based on the existing rules, it’s important to understand how they could be affected by this change.

You may not need to make any changes to your plans. However, reviewing your position before the new rules take effect could give you more time to understand your options and avoid having to make hasty decisions later on.

Remember that tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

Under the current rules, unused pension savings held in most discretionary pension schemes generally sit outside your estate for the purpose of inheritance tax. This has influenced how some people have chosen to use their wealth in retirement.

For example, you may have planned to spend money held in ISAs, cash or other investments first, while leaving more of your pension untouched to pass on to your family.

From 6 April 2027, that calculation could change. Most unused pension funds and pension death benefits will be included in your estate alongside assets such as your home, savings and investments for inheritance tax purposes.

Whether the changes lead to a higher IHT bill will depend on your circumstances, including the allowances and exemptions available to your estate. However, a plan that was designed around the current rules may no longer produce the outcome you intended for your retirement and what you pass on to your beneficiaries.

Retirement planning often involves balancing two key objectives: making sure you have enough money to support your lifestyle in retirement, while deciding how much to leave to the people who matter to you.

If you hold a large proportion of your wealth in pensions, it may be worth considering how your overall estate could look after April 2027. Equally, if your estate is already close to the inheritance tax threshold, bringing previously excluded pension wealth into the calculation could potentially create or increase an IHT liability.

It may also be a good opportunity to review your will and wider estate plans to check they still reflect your priorities today. Your financial position, family circumstances and retirement needs may have changed since those plans were first put in place.

Remember there is no single action that will be right for everyone.

For some people, the best approach might be to continue with their existing plans. Others may want to consider how they draw income from different assets, whether making gifts could form part of their longer-term plans, or whether existing arrangements should be reviewed.

However, making a decision purely to reduce a future IHT bill could have unintended consequences. Withdrawing more from a pension, for example, may affect your income tax position and reduce the money available to support you later in retirement.

This is why it’s important to understand the trade-offs rather than react to one tax change in isolation.

Effective retirement and estate planning often works best when there is time to consider different scenarios.

Waiting until the new rules are about to take effect could leave significantly less time to understand how changes might affect your retirement income, tax position and beneficiaries. Some planning decisions may also have longer-term consequences, so acting quickly without considering the wider picture may not produce the result you want.

There is an important practical reason to review your affairs too. HMRC states that personal representatives should take reasonable steps to identify relevant pension schemes when administering estates after the rules change. Keeping a clear, up-to-date record of your pension arrangements could therefore make it considerably easier for those managing your estate. You do not need to become a pensions or tax expert.

It may be useful to consider some simple questions, such as:

•    How much of your wealth is held in pensions?
•    Who do you want to benefit from your estate?
•    Will your current retirement income strategy still make sense after April 2027?
•    And would your existing plans still achieve what you want for you and your family?

The answers can help you decide whether your plans need adjusting or simply confirm that you remain on track.

This article is for information purposes only. It is not intended as investment advice.

Fees, charges and eligibility criteria apply.

The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits which isn't guaranteed and can do down as well as up. The benefits of your plan could fall below the amount(s) paid in.

Lloyds Wealth does not provide personal tax advisory and tax compliance, estate planning and administration, trust creation and management or will writing, however we can introduce you to a relevant specialist.

Lloyds Wealth might receive a referral fee from some of the partners we introduce to you.

Any views expressed are our in-house views as at the time of publishing.
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