HMRC, the tax authority under the Labour government, has published new guidance on inheritance tax reforms that will bring most untouched pension funds into estate calculations from April 6, 2027. This move is set to target families who have built up substantial pension savings.
What Changes from April 2027?
Currently, pension funds generally sit outside a person's estate for inheritance tax purposes, making them a tax-efficient way to pass wealth. From April 2027, this changes dramatically. Andy Wood, tax expert at Tax Barrister UK, explained: "Many families who have built up substantial pension savings could find a larger proportion of their estate becoming liable for inheritance tax."
Wood noted that many retirees have chosen to draw income from other assets while leaving pensions untouched due to these tax advantages. "Those strategies may become far less effective once pensions are brought into scope for inheritance tax," he added.
Impact on Estates and Planning
The government estimates that from 2027 to 2028, of around 213,000 estates that include pension wealth, about 10,500 will likely face an inheritance tax charge. Currently, a pension scheme member could save unlimited funds (subject to the Lifetime Allowance and Lifetime Standard Benefit Defined Amount) untouched in a pension product to be passed free of inheritance tax to beneficiaries.
Wood advised families to keep records of pension arrangements up to date and easily accessible. "Many people have accumulated multiple workplace pensions throughout their careers. Tracking down historic schemes, obtaining valuations and dealing with several providers could become a time-consuming process for executors," he said.
Government Rationale
HM Treasury stated: "This change has been introduced to prevent pension schemes from being increasingly used and marketed as a tax planning vehicle to transfer wealth, rather than for their intended purpose of funding retirement."
Wood emphasized that these changes will not affect every family, but anyone with significant pension savings should review their estate planning arrangements sooner rather than later.
