For years, pensions have been a go-to strategy for passing wealth to the next generation tax-efficiently.
This is why the ongoing implementation of the new Inheritance Tax (IHT) rules has caused a great amount of concern for many.
The existing rules held that most defined-contribution pensions sit outside your estate for IHT purposes.
This meant that dying before enjoying your full pension resulted in your heirs getting the benefits of it in your stead.
What changes are coming to IHT?
From 6 April 2027, the scope of a person’s estate for IHT is expanding to include any unused pension funds and death benefits.
Depending on the overall size of your estate and the allowances you’ve used, these assets could then face up to 40 per cent tax.
The current exemption where pensions can pass tax-free to children and other beneficiaries will largely vanish, surviving only when the money goes to a spouse or civil partner.
Crucially, these reforms apply no matter where you live.
British expatriates in Portugal, Spain, France, Cyprus, Malta or beyond won’t escape the new rules.
With IHT thresholds frozen at today’s levels until at least 2030, rising asset values mean ever more families risk being drawn into the IHT net.
What can you do now?
First, take a fresh look at your pension’s current value as part of your total estate.
You should also revisit your beneficiary nominations as leaving your pension to a spouse or civil partner will still safeguard it from IHT.
This is only a temporary solution, but it may provide some time to restructure your assets.
You may also want to consider taking more income from your pension during retirement and enjoying it while you are alive rather than letting it fall into IHT once you are gone.
If your estate is nearing the IHT threshold or if you are generally concerned about your financial legacy, you should seek professional advice.
Pensions containing property or other illiquid investments should be tackled early to avoid rushed asset sales.
The clock is ticking and acting before 2027 gives you the best chance to reduce your family’s tax exposure and spare them administrative headaches down the line.
Keep control of your financial future by speaking to our team today!
