Upcoming changes to Inheritance Tax (IHT) rules will see most unused private pension pots included in your estate from April 2027.
Traditionally, pensions have fallen outside the scope of IHT, making them a tax-efficient way to pass on your wealth.
However, the new rules mean that you might need to make some adjustments to your estate planning.
Read on to find out how to protect your loved ones from a large or unexpected IHT bill in light of these changes.
Taking action now could help mitigate IHT when the proposed changes come into force
Being aware of the changes is the first step. At Fingerprint, we’ll always keep you up to date with new legislation, helping you to make an informed choice.
But, according to Professional Adviser, 19% of high net worth individuals (HNWIs) are unaware that unused private pensions will be treated as part of their estate for IHT purposes from April 2027.
Of those who are aware, a quarter said they weren’t taking any action in response.
However, simply leaving your estate plans as they are could mean that your beneficiaries have to pay IHT or face a larger-than-expected bill.
Preparation upfront can help to manage your wealth in a more tax-efficient way, still passing it on to your loved ones, but without the associated tax burden (or with a smaller liability).
Pensions falling into the scope of IHT are:
- Unused defined contribution (DC) pensions
- Lump sum death benefits from DC and defined benefit (DB) schemes (to beneficiaries other than a spouse or civil partner).
Thankfully, there’s still time to prepare before the proposed rules come into force in April 2027.
Four ways you could help to protect your beneficiaries from IHT now
1. Use your pension to fund your retirement
Essentially, this is what pensions are intended for. However, as they have historically been such an effective method for passing on tax-efficient wealth, many people have preserved their pension pots for their beneficiaries and used other income sources for retirement.
You could consider taking out an annuity, which will offer you a guaranteed annual income for the rest of your life, in exchange for a lump sum from your pension pot – thus potentially removing it from your estate.
2. Maximise your nil-rate bands in your estate plan
IHT is generally charged at 40% on the portion of your estate which exceeds the nil-rate band. In the 2025/26 tax year, this is £325,000.
You can also take advantage of the residence nil-rate band, currently £175,000. This applies when you leave your main residence to your children, grandchildren, or other direct descendants.
Added together, these give you a potential allowance of £500,000 free from IHT. Spouses and civil partners can pass on unused allowances, too, giving you a possible £1 million before your estate comes into the scope of IHT.
The chancellor has announced that these thresholds will be frozen until 2031, so carry out your estate planning with this in mind.
3. Use life insurance put into trust to help your loved ones pay an Inheritance Tax bill
Buying a life insurance policy using some of your pension savings can have a dual benefit. First, you’ll be accessing your pension pot’s value and removing it from your estate for IHT purposes. Second, the life insurance can be paid to your beneficiaries, who can use it to cover an IHT bill.
Crucially, however, this needs to be written into trust, to avoid the life insurance funds being added to your estate. Writing the policy into trust means that the funds will initially be paid to the trustees, thereby keeping them separate from your estate.
4. Gifting to loved ones or charity
In some cases, making gifts from your wealth before you die can help to mitigate IHT. There are three common ways to approach gifting:
- You can gift up to £3,000 each tax year, using the annual exemption. This can be given to one person or split between people. Gifts above this amount will usually be subject to IHT if you die within seven years, although the rate applied begins to taper after three years.
- Gifts to loved ones from surplus income are also exempt, as long as the gift is made from your usual income, rather than savings or investments, and doesn’t adversely affect your standard of living. These gifts need to be made regularly.
- Any donation left to charity in your will is automatically IHT-exempt. If you leave 10% or more of your net estate to charity, this could have the added benefit of reducing the amount of IHT applied from 40% to 36%.
If you leave everything to your spouse, civil partner, or a charity, they won’t need to pay any IHT at all.
Get in touch
Estate planning can be complex and is highly individual to your circumstances. We’d always recommend you take financial advice to establish the options available to you.
We’re here to help. Please get in touch by emailing hello@fingerprintfp.co.uk or calling 03452 100 100.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate estate planning, or tax planning.