Pension and Inheritance Tax – changes you should know

Big changes are coming to pensions and Inheritance Tax (IHT) rules, and they could affect how much of your hard-earned money you can pass on to your loved ones. These changes may have profound implications for your retirement and estate planning strategies.

IHT basics and allowances

IHT is charged at 40% on estates exceeding allowances, including a £325,000 Nil-Rate Band and up to £175,000 Residence Nil-Rate Band (where a quality residence is left to a direct descendant). The Residence Nil Rate Band is tapered for estates over £2 million. Unused allowances can transfer to surviving spouses, allowing up to £1 million tax-free inheritance in some cases.

What’s changing?

• Pensions included in estate: From April 2027, unused pension funds and most pension death benefits will be counted as part of the estate for IHT purposes, potentially increasing IHT liabilities for beneficiaries.
• Increased IHT liability: Previously exempt pension funds will now be taxed within the estate, possibly reducing the inheritance received by family members.
• Delayed beneficiary access: HMRC assessment of an estate, and the need to complete probate before pension death benefits are paid may delay beneficiaries’ access to pension funds during an emotional period. This is also likely to delay pension capital passing to a spouse and potentially cause financial hardship prior to access.
• Pension valuation for IHT: Pension value at death will be assessed by scheme administrators and added to the estate for IHT calculation. Planning can help you minimise tax payable.

Actions to discuss with your Origen financial adviser

1. Work out the total value of all your pensions and assets – now and in the future, to estimate your potential IHT liability. Your financial adviser can assist with calculations and recommend strategies to minimise estate taxes.
2. Review your IHT and estate planning options – early planning is essential to ensure your assets are passed on efficiently and with minimum tax:

• Lifetime Gifts: Gifting assets or money during your lifetime can reduce your estate’s size and may be IHT-exempt if you live at least seven years after the gift.
• Regular gifts from income: Regular gifts from surplus income (without reducing your estate’s capital) are immediately exempt from IHT.
• Trusts: Transferring assets into trusts can remove them from your estate for IHT, but it’s important to seek financial advice.
• Spousal Exemption: Assets left to a spouse or civil partner are free from IHT, including unused pension funds and death benefits.
• Will planning – IHT is paid at the lower rate of 36% if you leave at least 10% of your net estate to charity.

Consider alternative investment strategies – review your investment portfolio to ensure it matches your goals and maximises tax reliefs. From 6 April 2026, a combined allowance of £1 million will apply for investments that qualify for Business Relief with 100% relief from IHT. Amounts above this allowance will get up to 50% IHT relief (20% IHT payable). AIM investments do not count towards the new allowance and will receive only 50% IHT relief on qualifying investments.

3. Business Relief investments are high-risk and not for everyone, but may offer efficient, complementary investment options for a small part of investable assets, as they can provide relief from IHT if held for two years, rather than the usual seven years as for lifetime gifts.

4. Talk to your beneficiaries – make sure they understand your plans and know what to expect. Clear communication prevents misunderstandings and ensures your wishes are carried out.
5. Take financial advice – navigating the changes can feel overwhelming. Your Origen adviser will:

• Help you understand the new rules and implications for your financial plans.
• Recommend strategies to minimise IHT tailored to your circumstances.
• Ensure your plans align with your long-term financial goals.
• Maximise efficiency with regards to income generation, factoring in pension withdrawals compared to investment portfolio withdrawals in light of the forthcoming changes to pensions.

6. Plan ahead – the proposed changes are not due to come into effect until April 2027. Until then, pensions remain an attractive home for your retirement savings, with no changes to tax-relief on contributions or the taxation of lifetime benefits.

However, planning ahead gives you more options and helps avoid last-minute decisions. Whether it’s revisiting your retirement income strategy, exploring tax-efficient investments, or updating your estate plan, take time now to explore your options and seek financial advice. Your future, and your family’s, is worth it.

Did you know

IHT raises over £7.5 billion in tax and affects about 4% of UK estates annually. Experts estimate this will rise to 7% of estates by 2032.

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