From April 2027, most unused defined contribution pension pots and certain pension death benefits will be included as part of your estate for inheritance tax purposes. Under current rules, pensions are usually excluded from your estate, making them one of the most tax-efficient ways to pass on wealth after your death.
Lisa Caplan, director of Charles Stanley Direct Advice and Guidance, part of Raymond James Wealth Management, said: “Anyone with significant pension wealth needs to urgently review their planning, especially if they had previously planned to leave pension assets to anyone other than their spouse. Beneficiaries stand to face a double whammy of income tax and inheritance tax on pension assets left to them assuming the donor passes away over the age of 75.”
If you’re concerned about how the changes could affect your family, here are some of the steps you might want to consider now.
Maike Currie, spokesman for PensionBee, said: “One simple but important thing people can do now is ensure their expression of wish forms detailing their beneficiaries are up to date with all pension providers. Clear beneficiary information and accurate records could significantly reduce delays, confusion and stress for loved ones later on.”
2. Consider consolidating if you have lots of pensions
If you’ve paid into lots of different defined contribution pension schemes over the years, you might want to consider consolidating them into one plan, to make your retirement savings easier to manage and also to make life simpler for loved ones when you die.
However, consolidation isn’t right for everyone. Defined benefit or final salary pensions, which provide a guaranteed income for life, are often valuable and may be best left where they are. Before transferring any pension, check whether valuable guarantees or benefits would be lost.
3. Start gifting earlier
Ms Caplan said: “Anyone can give away £3,000 tax year free of potential inheritance tax, and you can make any number of smaller gifts of up to £250 per person a year.”
Some people may also benefit from using ‘surplus income’ gifting rules. These allow you to make regular gifts from income, rather than savings, without triggering inheritance tax, provided the payments don’t affect your standard of living. Keeping clear records is important if you use this exemption.
Pension and inheritance tax planning can be complicated, so financial advice may be worth considering if you’re unsure of the best ways to keep tax bills to a minimum.
Request your free guide to pensions planning from our partner Pense
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