Building a pension has long been seen as a tax-efficient way to pass on wealth. So, it came as a surprise to many when, during last year’s Autumn Budget, plans were announced to include  unused pension funds and death benefits within the value of estates for IHT purposes. What does the change mean for pension savers? And what should you do now?   

There has been a general perception in government that pensions have been used widely to enable intergenerational wealth transfer rather than for their intended purpose to provide an  income in retirement. Consequently,  the government have announced that unused pension funds will fall into an individual’s estate for IHT purposes on their death. Under the proposals, pension administrators will be required to calculate, report and pay IHT directly to HMRC. This  means that unused pension funds will no longer be protected from IHT. To give an example, the family of someone with a £500,000 pension and other assets already pushing them over the  £325,000 IHT threshold could face a 40% tax bill on the pension as well as any Income Tax that may be due on  payments to a beneficiary.   

Don’t panic   

Much uncertainty remains about the details of the plans. The government is expected to deliver specific implementation guidance later this year, once it has conducted a technical consultation and a review of the feedback. Until then, it is hard to say exactly how the changes might affect  the tax situation of individual pension holders, except that it is clear certain death benefits from remaining pension funds will be taxed at a higher rate than is currently the case. Moreover, any  changes will not take effect until 6 April  2027, providing time to review and adapt plans accordingly.  

Established estate plans   

While the implementation of any changes remains a couple of years away, it is wise to consider potential implications. This is especially the case for holders of established estate plans: once details are confirmed, there may be alternative options that ensure your estate remains as tax  efficient as possible.  

For now, though, it is best to start by discussing with your financial adviser what the implications could be for you and potential actions that could be taken whilst awaiting the final guidance before overhauling plans. Come what may, we’ll always be here to help you secure your family’s future with confidence.  

Inheritance tax planning and Estate planning are not regulated by the Financial Conduct Authority. 

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK.