Inheritance Tax (IHT) Changes on Pensions from April 2027 – What Over-50s Need to Know
In the 2024 Autumn Budget, the Chancellor announced major changes to the way pensions are treated for Inheritance Tax (IHT). These reforms, coming into effect on 6 April 2027, could significantly impact estate planning for those over 50.
How Are Pensions Currently Treated for IHT?
At present, unused defined contribution (DC) pensions are not counted as part of a deceased person’s estate for IHT purposes. This means:
- If you die before age 75, your pension can usually be passed to beneficiaries tax-free.
- If you die after age 75, your beneficiaries may have to pay income tax on withdrawals, but no IHT.
This has made pensions an attractive tool for estate planning, as they allow wealth to be passed on efficiently.
What’s Changing from April 2027?
From 6 April 2027, unused pension savings will be included in the deceased’s estate for IHT calculations. This means:
- Any remaining pension funds could be subject to IHT at 40%, depending on the total value of the estate.
- The IHT-free threshold remains £325,000 per person (£650,000 for married couples/civil partners).
- The residence nil-rate band may allow up to £1 million to be passed on tax-free when a home is left to direct descendants.
This shift means pensions will no longer be a ‘safe haven’ from IHT, potentially increasing the tax liability for beneficiaries.
How Will This Affect Estate Planning for Over-50s?
For many over-50s, pensions have been a key part of inheritance planning. With this change, new strategies may be needed to minimise tax liabilities.
What Can You Do to Reduce IHT on Your Pension?
✔ Use Pension Savings in Retirement
Consider drawing from your pension to reduce the pot size, rather than leaving large sums untouched.
✔ Gift Assets During Your Lifetime
Gifts made more than seven years before death are usually exempt from IHT.
✔ Review Your Estate Planning
Ensure wills, trusts, and beneficiary nominations are up to date.
✔ Seek Financial Advice
A professional can help explore options like trusts and tax-efficient investments to mitigate IHT exposure.
Final Thoughts
The 2027 changes will fundamentally alter the way pensions fit into estate planning. If you’re over 50, it’s important to review your financial strategy and ensure your plans align with the new rules.
For more details, visit The People’s Pension website
