Action Plan: Protect Your Legacy with the 2027 Pension Changes in Mind

With potential new rules making pensions part of your estate for inheritance tax (IHT) from April 2027, it’s essential to take steps now to reduce the impact on your estate’s value. Here’s what you should consider:

1. Withdraw Your Tax-Free Lump Sum: If eligible, take the 25% tax-free lump sum from your pension to reduce its value within your estate.

2. Allocate High-Growth Assets to Younger Family Members: If you have a Self-Invested Personal Pension (SIPP), consider assigning high-growth assets to younger family members who will benefit more from long-term growth.

3. Adjust Pension Contributions by Generation: Avoid making pension contributions for older family members in a business. Instead, prioritize contributions for younger family members to maximize tax efficiency and growth potential.

4. Review Your Total Estate Value: Sit down with your accountant or financial advisor to assess your full estate value, particularly given the potential inclusion of pensions for IHT purposes.

5. Consider Alternative Asset Management: Explore options for other assets outside your pension—such as gifting or placing them in trust—to help reduce your estate’s overall taxable value.

Why These Changes Matter

The Autumn Statement proposes that, from April 2027, unused pension funds and death benefits would be counted as part of your estate for IHT purposes. This could increase the IHT liability on your estate, as pensions, which were once mostly shielded, would add to the estate’s taxable value.

Pension Tax Benefits Remain

Despite the potential changes, pensions continue to offer significant tax relief today. Higher-rate taxpayers save 40% on contributions, basic-rate savers get a 20% boost, and business owners can save up to 25% on corporation tax. Additionally, investments within your pension grow free from capital gains and income tax. Now more than ever, it’s crucial to review your legacy strategy with your advisor to optimize for today’s benefits while preparing for future changes.