IHT on Pensions Update

Inheritance tax has for many years been capturing more and more families, who perhaps would never have been considered as candidates for a tax historically associated with the very wealthy. The Government’s announcement in 2024 that pension funds will also be included in the IHT calculations from April 2027, will entrap even more of us and the fact is, our role as financial planners is requiring us to consider IHT planning for a higher proportion of our clients.

Of course, we also see a wide range of opinions on this tax. Some clients are somewhat ambivalent, commenting that the family will still be handed a healthy inheritance, others will do all they can to avoid any potential inheritance tax, but the reality is most clients sit somewhere between these two reactions.

The inclusion of pensions funds is a big deal. We have a large chunk of clients who had strategically left their pensions untouched, planning to leave the value to their children in a tax efficient manner, these clients now need to rethink their plans. Many of them are pretty fed up with these developments, but in many ways, it’s not that surprising that the rules have changed.

The impact of providing tax relief on pension contributions costs the Government around £70 billion a year, but this tax break was never intended to create a nifty inheritance tax mitigation vehicle for the wealthy, it is in place to help us accumulate funds to prepare for a comfortable retirement and not be over reliant on state benefits.

Some clients are asking, “what should we do now?” The answer could be to spend the pension and enjoy the proceeds or maybe give the income away, which brings in further tax saving opportunities described on page 4. For those particularly concerned with the IHT position, they might consider taking out a life assurance policy to cover all or some of the liability and fund the premiums from pension withdrawals. This can provide an attractive solution to those who are not so keen to make significant lifetime gifts.

Reviewing the death benefit nomination of a beneficiary form is also an opportunity to rethink the potential direction of benefits and this process might also trigger a review of Wills and Expression of Wish considerations.

It’s not unusual for tax rules to change and it’s not always to our liking, but a structured financial plan, should be capable of dealing with a few bumps in the road, and if the recommendation from us is to spend your pension, then perhaps that’s not the worst financial advice you’ll ever receive! Tax treatment depends on individual circumstances and may change. Taking money from your pension may reduce your retirement income.

The information supplied is based upon our understanding of current UK law and HM Revenue and Customs (HMRC) practice. Tax law and HMRC practice may change from time to time. The value of any tax relief will depend on the individual circumstances of the investor. This is our understanding of the proposals so far and these may be liable to change as further regulations are introduced. You should be aware that the value of an investment can fall as well as rise and that investors may not get back the amount they invested. The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. FMIFA or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication. You should be aware that the value of an investment can fall as well as rise and that investors may not get back the amount they invested. The Financial Conduct Authority does not regulate tax planning or trusts, nor Wills and Probates.

By Phil Harper | June 2026

Tax treatment depends on individual circumstances and may change. Taking money from your pension may reduce your retirement income.