A wealth expert has urged people to review their pensions ahead of a significant HMRC change. From April 6, 2027, most unused pension funds and pension death benefits will be included in the value of a deceased person's estate for Inheritance Tax purposes. This change aims to eliminate distortions that have led to pensions being used as tax planning vehicles rather than for retirement funding, and to address inconsistencies in the Inheritance Tax treatment of different pension types.
Expert Advice on Pension Planning
Chris Ball, CEO at tax and pension advisers Hoxton Wealth, explained, "Leaving your pension untouched before you die is no longer a good move. For years, the advice was to spend everything else first, leave your pension alone, and pass it on to loved ones. But from April next year, pensions are no longer off-limits for HMRC. If your pension is large enough, upon death, up to 40% could go to HMRC, leaving only 60% for your family."
Strategies to Mitigate Inheritance Tax
Ball suggested a strategy to move pension funds out of an estate while alive: "If you draw money from your pension, gift it to a loved one, and survive seven years after that gift, the money falls outside your estate for inheritance tax. You will pay some income tax when drawing from the pension, but the alternative is your family paying 40% inheritance tax upon your death. For example, if you draw £500,000 from your pension and gift it over time, and survive seven years, that half a million is outside your estate, saving your family £200,000."
He emphasised careful planning: "You do not want to gift what you cannot afford and end up without enough for your own retirement. So ensure you only gift a sensible amount to maintain your financial security and standard of living. This strategy is not just about tax; it is about sharing what you have built and deciding who benefits. Whether helping children or grandchildren buy a home or ensuring loved ones are looked after, April 2027 is not far away, and some planning takes time. Reach out to an FCA-regulated adviser to discuss how this strategy could help you and your family."
