Pensions and Inheritance Tax Update
What’s Changing?
From the 6th April 2027, pension funds will be included in estate valuations. They are currently excluded from Inheritance Tax (IHT) calculations. Depending on your total asset value, it could result in a 40% tax charge. A significant change in tax rules! We spend our days helping clients with Estate Planning and Inheritance Tax, so we are here to help guide you through the options.
What are we asking clients to consider?
1.Tax-free lump sums
If you have any available tax-free lump sum, you might consider withdrawing some or all of it and reinvesting into a qualifying investment that becomes IHT-exempt after two years. This choice will depend on your financial situation and risk appetite, so it’s important to get the right advice.
2.Gifting surplus pension income
If your pension withdrawals exceed your income needs, consider drawing taxable income and giving it to children, grandchildren or other family members. The seven-year clock is ignored if this gift doesn’t financially disturb your lifestyle, is a regular payment and leaves your estate immediately.
3.Life Assurance planning
If you’re in good health, drawing income from your pension to fund the premiums towards a Life Assurance policy, could be a tax-efficient way to provide your beneficiaries with a lump sum to help cover any IHT liability.
4.Spending your wealth
A popular and often overlooked strategy is simply to enjoy your wealth by spending it! We often use the phrase ‘don’t let the tax tail wag the dog’, which suggests if drawing pension income means paying higher-rate tax, it may still be worthwhile if it enhances your lifestyle and reduces your estate. Our Cashflow Planning tool can review your data and deliver a snapshot of the future to help you shape your spending plans.
5.Planning before your 75th birthday
If you are over 75, your beneficiaries will still need to pay income tax at their marginal rate on pension withdrawals made after your death. Withdrawing tax-free lump sums before you reach your 75th birthday has become a more relevant part of effective tax planning.
6.Residential Nil Rate Band (RNRB)
The RNRB is £175,000 per person but it tapers by £1 for every £2 that the estate value exceeds £2 million. Including pension funds could push some estates above £2 million, reducing or eliminating their RNRB entitlement.
By Phil Harper | September 2025
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