Many people have long viewed pensions as outside the scope of IHT planning. But changes announced in the 2024 Budget mean that defined contribution pensions could form part of an estate for IHT purposes from April 2027.
George Square’s Dick Durrant and LGT Wealth Management’s David Lane discuss the potential impact of the change to pensions and IHT in the video below. This article summarises some of the key points raised and outlines practical steps you may wish to consider.
What’s changing to pensions and IHT?
In the October 2024 Budget, the Government announced that, from 6 April 2027, most defined contribution pensions, such as personal pensions and self-invested personal pensions (SIPPs), will be included in a person’s estate for inheritance tax purposes.
This means that, when someone dies after that date, the value of their pension fund could be taken into account when calculating the total estate value. Whether inheritance tax will actually be payable will depend on a range of factors, including the overall size of the estate, available nil-rate bands and any exemptions or reliefs that apply.
While the finer details are still being confirmed, it’s likely this change will affect people who have built up significant pension savings alongside other assets such as property or investments.
Previously, most pension funds sat outside the estate for inheritance tax purposes, which meant they were often seen as a tax-efficient way to pass on wealth. With this change, pensions may now form part of the calculation, potentially increasing an estate’s taxable value. As such, many people could benefit from reviewing their financial position before the rules come into effect. Understanding what you own and how your assets interact under the new regime may help avoid surprises later on.
How to review your position
- Check which pensions may be affected
Not all pension arrangements are treated the same, so it’s important to confirm whether your specific plans fall within the new rules.
- Estimate your potential inheritance tax exposure
Combine the value of your pension funds with your other assets, such as property, savings and investments. This helps you understand whether you may have an inheritance tax issue after April 2027.
- Consider planning options
If you do face a potential liability, there are several ways to help manage it. The right approach will depend on your health, income needs and long-term financial goals.
One possible solution: life insurance written in trust
One traditional method that could help is arranging a life insurance policy written in trust. This approach aims to provide cash for your executors to pay any inheritance tax bill without needing to sell other assets.
In simple terms, a life policy is arranged for an amount that reflects the estimated inheritance tax liability. The policy is placed in trust, so the proceeds sit outside your estate for tax purposes. When you die, the policy pays out to the trustees, who can use those funds to help settle any tax owed.
This route may not suit everyone, but it could offer peace of mind that there will be liquidity available for your estate when needed. Your adviser can help assess whether this could be appropriate for your circumstances.
Take action now
Although the change to pensions and IHT is not due to take effect until April 2027, reviewing your situation early could help you prepare in good time. A short review could highlight whether you’re affected and what steps, if any, might help manage your position.
At George Square Financial Management, we can confirm whether your pensions are likely to be included in your estate, estimate your potential inheritance tax exposure, and explore suitable solutions, including life cover, trust structures and wider estate planning.
If you have concerns about how the change to pensions and IHT could affect you, please call us on 0115 947 5545 or send us a message here.