Sunir Watts, Partner, and Vanina Wittenburg, Senior Associate, in our Private Client department, explore the implications of the proposed inheritance tax changes on pensions and estate planning.
Currently, pension death benefits fall outside the deceased’s estate and are not subject to inheritance tax (IHT) if paid at the discretion of scheme trustees. This has made pensions a valuable tool in estate planning, especially for those wishing to benefit children or grandchildren.
A typical strategy involves leaving non-pension assets to a surviving spouse and contributing excess income into pension pots, which are then nominated to non-exempt beneficiaries. This approach has helped minimise tax liabilities and maximise flexibility across generations.
However, from 6 April 2027, unused pension funds will be included in the deceased’s estate for IHT purposes, regardless of trustee discretion. This marks a significant shift, requiring personal representatives to coordinate with pension scheme administrators (PSAs) to assess and settle tax liabilities.
While dependants’ scheme pensions and death-in-service benefits will remain outside the scope of IHT, the broader inclusion of pension pots introduces complexity and potential delays in fund distribution.
Advisers must now reconsider existing nominations and explore alternative strategies, such as gifting surplus pension income or investing in IHT-efficient vehicles. The changes underscore the need for integrated advice from legal and financial professionals to navigate the evolving landscape of estate planning.
Read the full article on the Taxation website [subscription required].