Your Guide to Pensions & Inheritance Tax

Planning for your future and how best to protect loved ones when you die, is an important part of life – and includes factoring in your pension and whether any inheritance tax is owed.

Your pension type will dictate if inheritance tax is owed, although most are currently exempt from inheritance tax and are an efficient way to pass on wealth. This is because the majority of pensions are paid to a nominee or someone the pension company chooses and are not considered yours to give away as part of your estate unless you stipulate this in your Will, meaning pensions aren’t normally included as part of an estate’s inheritance tax calculations.

All of this is true – until now, as this rule is about to change.

From April 2027, when someone dies their estate will include their pension death benefit. For many estates, the pension added to the overall estate value will mean it exceeds the tax-free allowance and become subject to inheritance tax.

Pension Death Benefits – Currently

Pension death benefits provide financial support to beneficiaries after a loved one’s death. While it varies depending on the type of pension an individual has, defined contribution pensions that enable people to build a sum of money, can normally be passed to nominated beneficiaries. These benefits are usually free from inheritance tax, provided the pension company is happy to pay out.

Pension Death Benefits – From April 2027

From April 2027, most pension death benefits will become subject to inheritance tax.

Will The New Pension Rule Change Affect You?

The new pension rule change taking effect from April 2027, means that for most of us, pensions are no longer going to be an efficient way to pass wealth on to loved ones. Instead, you’ll need to manage tax exposure by updating your Will and considering other ways to distribute or spend pension money in your lifetime.

If you have any unused benefit at the time of your death, this amount will likely be included within your estate and potentially be liable for inheritance tax.

Inheritance Planning

The new rule represents a big change in estate planning and means that a new approach to inheritance planning as an individual is needed.

Tips for inheritance planning include:

• Speak to your pension company to find out more about your particular pension and the rules regarding death benefit, nominating someone in your Will, and how much could be paid to beneficiaries.
• Establish how much your pension is likely to add to the worth of your estate.
• Seek advice from a Wills specialist to write the most effective Will for you.
• Choose your executors wisely as executors of an estate are responsible for paying any inheritance tax that is owed. They have the authority to ask the pension company to pay a percentage of the tax straight to HMRC before distributing the estate to beneficiaries. This has to be done quickly, though, and within six months of the date of death.

Helping You With Your Pension & Inheritance Planning

With the pension death benefit rule change coming in from April 2027, it’s important you understand what this might mean for you and your estate planning. Pensions will, from April of next year, be included in the estate for inheritance tax purposes, and tax may be payable if the inclusion tips the estate value over the tax-free allowance.

This change will mean that a lot of people will have to pay inheritance tax on the remainder of their benefit when they die.

The good news is that there are steps you can take to minimise the impact of your estate’s inheritance tax amount.  Start by speaking to your pension company to establish the key details regarding your pension death benefits – and then contact one of our Wills specialists who will advise you on the most effective Will for you.

To speak to us about your pension and your Will, you can contact us at our Chorlton office on 0161 860 7123 or email chorlton@hlfberry.com or at our Failsworth office on 0161 681 4005 or email failsworth@hlfberry.com and we will be happy to help.