It is increasingly important to consider pensions alongside other assets when planning
For families with substantial pension savings, the rules are changing. From 6 April 2027, most unused pension funds and pension death benefits will form part of an estate’s value for Inheritance Tax (IHT) purposes. The change could prompt people to reconsider how they use their pension savings and pass wealth to the next generation.
While most estates are still expected to have no Inheritance Tax liability, the reforms mean some families could face a higher tax bill. This makes it increasingly important to consider pensions alongside other assets when planning for long-term financial and estate matters.
Consider gifting during your lifetime
One potential approach is to consider whether some wealth could be passed on during your lifetime rather than retained within your estate. This could include making contributions to a loved one’s pension, helping them build their own retirement savings while potentially reducing the value of your estate.
However, a payment into someone else’s pension is generally treated as a gift for Inheritance Tax purposes, so the rules on lifetime gifts need careful consideration. The £3,000 annual exemption can be used for qualifying gifts, and regular gifts from surplus income may also be exempt if certain conditions are met.
Understand the seven-year rule
Larger gifts that do not qualify for an exemption may fall outside your estate if you survive for seven years after making them. These are known as ‘potentially exempt transfers’. If you die within seven years, the gift may be relevant for Inheritance Tax calculations, depending on the circumstances and the value of other gifts made.
This means gifting can be a long-term strategy rather than a quick way to reduce a potential tax bill. You also need to consider whether you can afford to give money away without compromising your retirement income or financial security.
Review how your pension is used
The forthcoming changes could also prompt some people to reconsider whether to leave significant pension wealth untouched. Depending on your circumstances, drawing an appropriate level of income in retirement and using other assets strategically could affect the eventual value of your estate.
However, withdrawing money solely to avoid Inheritance Tax may not always be the right decision. Pension withdrawals can have Income Tax implications, and taking too much too soon could reduce the funds available to support you later in life.
Plan for the next generation
For some families, contributing to a child’s or grandchild’s pension could be a way to provide financial support while encouraging long-term saving. Even relatively modest early contributions can benefit from many years of potential investment growth.
There are limits and rules governing pension contributions; however, it is important to understand how they apply to both the person making the gift and the pension recipient. The most suitable approach will depend on your circumstances, objectives and wider estate.
Take advice before acting
The interaction between pensions, lifetime gifts, Inheritance Tax and retirement income can be complex. The rules are also changing, with further HM Revenue & Customs guidance and supporting material expected ahead of April 2027.
Rather than making large withdrawals or gifts simply because of the forthcoming changes, consider reviewing your overall financial position first. A coordinated approach could help you balance your financial security with your desire to pass more wealth to those you care about.
If you’d like to explore how your financial plans can better support the experiences that matter to you, please speak to your Lyndhurst adviser or get in touch with our team.
Next steps
Please don’t hesitate to speak with your Lyndhurst adviser.
Call Lyndhurst on 01582 715777 or email info@lyndhurstfm.co.uk
This article does not constitute tax, legal or financial advice and should not be relied upon as such. For guidance, seek professional advice. A pension is a long-term investment not normally accessible until age 55 (57 from April 2028, unless the plan has a protected pension age). The value of your investments (and any income from them) can go up or down, which would affect the level of pension benefits available. Investments can rise or fall in value, and you may receive back less than you invested.
