Seeking comment: Pensions to be brought into inheritance tax from April 2027

The worst response to these changes is inaction, yet unfortunately it is also the most common one. April 2027 sounds distant until you factor in the time needed to restructure a retirement plan properly. Immediate options include drawing down more deliberately to reduce the pot that falls into the estate or gifting earlier using the seven-year rule and annual exemptions to move wealth out of the estate entirely.

Review your pension nominations, which costs nothing and ensures the right people are in the right position. And for those with larger pots, converting part of the fund into an annuity is no longer the defeatist option it once seemed. The income is taxed once at your marginal rate, rather than twice in combination with inheritance tax and that changes the maths considerably.

This is a disgusting change that has undone years of sound financial planning. If you’ve been topping up your pension and you have an IHT issue, you need to speak with a professional asap. April is just around the corner and you do not want to get caught out.

“Some larger SIPPs do not simply hold cash and investments; they hold commercial property. That makes this a practical liquidity issue as well as a tax change. A pension may be valuable on paper without having enough cash readily available to meet an inheritance tax liability. The payment process therefore matters because commercial property cannot always be sold quickly or without affecting its value.”

From April 2027, pensions become far less attractive as a wealth transfer vehicle. Where the beneficiary is a higher rate taxpayer, the portion subject to both taxes can face an effective 64% rate: 40% IHT on the pension above the available nil rate band, then income tax as the beneficiary draws the balance where death occurs after 75. Unlike qualifying business or agricultural assets, pensions won't get specific IHT reliefs, nor the ten-year instalment option available for certain property and business assets. That can leave estates short of cash to settle the bill. The response will be behavioural - people will draw earlier, spend more and make lifetime gifts rather than preserve a pension for their heirs. For anyone with a substantial pot, retirement and estate planning increasingly need to be considered together.

A pension was never just a product. It was a deal, you lock your money away for forty years, and the terms will still be there when you need them. April 2027 tears that page out. Everyone’s fixated on the 64%, 40% inheritance tax, then income tax on whatever’s left . The quieter problem is liquidity. Pensions won’t get the reliefs farms and businesses get, nor the ten year instalment option, so a family holding commercial property in a SIPP can face a cash bill against an asset they cannot sell in a hurry. So watch what people do, not what they say. They’ll draw earlier, spend more, gift sooner. The Treasury has costed this assuming the pots sit still. They won’t. It will raise less than forecast and the real bill is the one you can’t put a number on: every saver now knows the rules can be rewritten after they’ve spent a lifetime obeying them.

Pensions forming part of the taxable estate will mean a double-whammy of tax for some people.

Generally a married couple can pass on up to £1m free of inheritance tax, when including the Nil Rate Band and Residence Nil Rate Band (RNRB).

The RNRB starts to get tapered down once a total estate exceeds £2m; £1 for every £2 over £2m, so at £2.7m it's completely gone.

To illustrate the tax impact; let's look at a married couple with a home and other assets outside of pensions totaling £1m. If they each had £1m in pensions too, then on second death before April 2027, £3m is passed on free of inheritance tax.

After April 2027, the £2m pensions are now taxable at 40%, but given the value of these pensions is also included when calculating the RNRB available, they lose this entirely, which means another £350k of their estate outside of pensions is taxable at 40% too. This leads to a £940k IHT bill.

Overnight, a third of the estate gets lost in tax based on this one tax rule change.

Fundamentally pensions were designed for retirement planning, but accidentally became a very tax efficient planning vehicle.

From April 2027, pensions fundamentally change from being an IHT planning option to potentially being part of the Estate Planning conundrum.

For larger pension pots, the danger is a double tax hit. IHT could apply at 40%, with beneficiaries potentially then paying tax when withdrawing the remaining pension. For an additional-rate taxpayer, the combined burden could reach 67%, often quoted as 64% using a 40% income tax assumption.

This changes the planning conversation. Simply preserving the pension until death may no longer be optimal. We could see greater use of pension withdrawals, lifetime gifting, trusts and insurance.

But don't let the tax tail wag the investment dog. Pensions remain highly tax efficient during lifetime. The answer isn't to automatically empty them, it's to model when, how and from which assets you should withdraw.