Although we return to a topic we have covered several times over recent months, we make no apology for doing so. Changes to pension legislation, which bring most unused pension funds within the scope of Inheritance Tax (IHT) from 6 April 2027, are set to reshape the financial planning landscape for many individuals.
Government analysis suggests that up to 10,500 estates will become liable for IHT directly as a result of the rule change in the 2027/28 tax year alone. Furthermore, up to 38,500 estates are expected to face a higher IHT bill in the same tax year once the value of unused pension funds is included.
Whilst the numbers alone are stark, the potential impact in years to come is likely to be even greater. IHT bands remain static, with the primary Nil Rate Band fixed at £325,000 since 2009, and the Government has already confirmed that this will remain unchanged until at least April 2031. As asset values rise, alongside other factors that increase estate values, such as inherited wealth, many more estates are expected to be affected in future years.
Technical Budget changes
At the Budget on 28 October 2026, the Government did not roll back the measures already legislated for in Finance Act 2026, but it did announce two technical amendments that will affect how the rules work in practice. Both will be introduced through Finance Bill 2026-27 and take effect from 6 April 2027.
The first amendment will allow a prospective personal representative to direct pension scheme administrators to pay the IHT due to HMRC when certain conditions are met. This means the process of gathering information and dealing with unused pensions can start before probate is granted.
The second amendment will let those administering an estate decide whether notional pension property is included in the estate’s general component or treated as a separate component when calculating the reduced rate of IHT. That rate of 36% applies when at least 10% of the net estate is left to charity. The change helps anyone who has already written a will with a charitable provision, as those wills will not necessarily need to be rewritten.
Engagement with professional connections
It is clear that the changes to the IHT treatment of unused pensions will affect the way many individuals and families approach estate planning and reinforce the need to take a holistic approach to financial planning, often in conjunction with other professionals.
As a result, our Chartered Financial Planners have been delivering a programme of seminars to solicitor and accountancy firms across Kent, London and the South East. The interactive sessions have focused on the practical aspects of how the rules are likely to be implemented from April 2027 and highlight planning steps to help deliver good outcomes for our mutual clients. Although we are only midway through the programme, the feedback we have received to date has been positive, and from our perspective, it has been highly beneficial to share information with professional connections and discuss planning opportunities.
Time for action
With the implementation of the new regime looming, many individuals would be advised to reassess their financial and retirement plans. If you have a substantial pension fund or your current financial plans are designed to pass pension assets to the next generation outside of your estate, now is the time to consider whether that strategy still achieves its objective. Without a review, an estate may face a tax bill that action could have avoided.
Practical steps begin with assessing existing pension arrangements, and where appropriate, consolidating pensions into a single manageable plan. This may be highly beneficial in providing a cohesive investment strategy and simplify lifetime planning and it may also ease the administrative burden on executors when dealing with unused pension funds on death. It is equally important to review any expression of wish for pension death benefits. Benefits passing to a spouse or civil partner will remain exempt from IHT, so the people you name can change the tax outcome.
Beyond these steps, the right course of action to take to reduce the impact of the new regime on your potential estate will depend on your individual circumstances and mix of assets. For some, gifting assets or using Trusts may be a sensible way of passing down family wealth and reducing the effect of pension funds entering the estate. For others, an insurance option or other mitigation tools, such as assets that qualify for business relief, may be appropriate. Each option carries trade-offs in terms of cost, control and complexity, further underlining the need for an individual approach.
Whilst tax efficiency should be an important consideration, a sensible plan needs to be balanced with the need to retain access to funds that may be needed in later life, potentially to cover the cost of long-term care.
Our experienced financial planners can undertake a thorough review of your pensions and other assets, balancing tax efficiency with the need to retain flexibility, and provide tailored advice to help limit the effect of these changes. Our truly independent status allows us to build a bespoke plan using products from across the marketplace, and the widest range of investment funds available to UK investors. Speak to one of the team to start a conversation.
