The UK government is set to rewrite the rules for pension inheritance. Starting April 2027, pensions will no longer automatically pass inheritance tax-free to beneficiaries. This could cost families thousands in unexpected taxes.
Currently, pensions sit outside your estate for inheritance tax purposes. When you pass away, these funds typically transfer to your beneficiaries without the standard 40% inheritance tax. However, from April 2027, this exemption will end.
Your pension will become part of your taxable estate, potentially subjecting beneficiaries to both inheritance tax and income tax. Martin Reynolds, a Chartered Financial Planner at London Wealth Advisors, says, “These changes create a potential double-taxation scenario that many families aren’t prepared for.” A £500,000 pension inherited from someone who died after 75 could face up to 45% income tax, depending on the beneficiary’s tax bracket, and 40% inheritance tax on the remaining amount. This could result in a total tax burden potentially reaching 67% of the original sum.
Several important exemptions might protect pension wealth:
– The standard nil-rate band of £325,000 still applies.
Changes to pension tax regulations
– The residence nil-rate band of £175,000 for homes left to direct descendants.
– Most dependents’ scheme pensions will remain exempt from inheritance tax. Sarah Thompson, Tax Specialist at Heritage Planning, explains, “Think of these nil-rate bands as safety nets. They won’t catch everything if your estate is substantial, but they provide crucial protection for smaller portfolios.”
To address these changes, consider these strategic adjustments:
– Rebalance your wealth between pensions and other tax-efficient vehicles.
Explore lifetime gifting strategies to reduce your estate’s eventual value. – Review beneficiary designations on all accounts. From April 2025, non-domiciled status will no longer exempt individuals from inheritance tax on foreign assets.
Taxation will be based on residency status, creating additional planning challenges for international investors. Schedule a comprehensive review with a financial advisor specializing in estate planning to assess your vulnerability to these changes and explore personalized strategies for mitigation. The sooner you adapt your approach, the more options you’ll have to protect your legacy and provide for those who matter most.
Photo by; Signature Pro on Unsplash