What the pensions and IHT draft legislation means for you

The government has now published draft legislation confirming what many of us have anticipated for some time. Subject to the final bill and Royal Assent in 2026, unused pension funds will become subject to inheritance tax (IHT) from April 2027.

While the changes won’t take effect for nearly two years and with logistical steps still to come in order for the proposed new rules to be made official, direction of travel is now clear. The exemption for pension death benefits from IHT, which many clients have relied on since 2015 as part of their long-term estate planning strategy, is coming to an end.

Under the current rules, pensions, specifically defined contribution schemes, can typically be passed on free of IHT. This has made them a highly efficient way to pass on wealth to children and grandchildren, particularly for individuals who don’t need to draw heavily on their retirement savings.

However, the draft legislation proposes to treat pensions like any other asset on death. This means that from April 2027, pension values could be included in a deceased’s estate for IHT purposes, potentially leading to a 40% tax charge on any value above the nil-rate band.

The new rules will apply from 6 April 2027, and only on deaths occurring after that date. That gives individuals time to prepare, but it also means existing financial plans may need to be fundamentally reviewed.

This shift is more than just a technical change. It may upend financial strategies that have been in place for a decade or more.

Many clients have chosen to preserve their pensions and instead draw income from ISAs, general investment accounts (GIAs), or investment bonds, while leaving the pension untouched as a way to pass wealth to future generations. But if pensions are no longer IHT-efficient, that logic may no longer apply.

In fact, pensions may go from being one of the most tax-effective ways to pass on assets, to one of the least. Depending on the age at death and the tax status of beneficiaries, pensions could now attract both IHT on the estate and then additional income tax on the beneficiaries.

As a result, clients may now want to consider spending from pensions first or buying an annuity, allowing other assets such as ISAs (which can be sold and transferred without income or capital gains tax consequences) to be used for gifting or trust planning.

There are also opportunities to restructure assets, revisit wills and consider the use of trusts or lifetime gifting strategies. Importantly, what’s most suitable will vary depending on your age, income needs, asset mix and family circumstances.

The good news is that you don’t need to rush into decisions. With the rules not coming into force until 2027, there is time to make considered changes. But the time to start planning is now.
We’re already working with clients to:

• Review their cash flow models and long-term wealth plans
• Explore tax-efficient strategies for passing on wealth
• Restructure how and when they draw down their pension vs. other investments
• Consider taking out life assurance policies to cover their IHT liability
• Reorganise their non-pension estate and legacy plans in light of the changes

These are complex decisions and getting them right requires advice tailored to your personal goals and financial situation.

While it’s disappointing to see a previously tax-advantaged vehicle lose that status, the reality is that the pension system has long been in the crosshairs of successive governments. The forthcoming change to IHT rules isn’t unexpected, but it does require a proactive response.

If you’re unsure what this means for you, or whether your current strategy remains appropriate, now is the time to talk to your adviser.

We’ll be sharing more detailed guidance in the lead up to the changes coming into force. In the meantime, if you’d like to review your financial plan or discuss your options, speak to your usual Evelyn Partners contact or book an appointment.