Experts at TWP Accounting are urging families and business owners to review their estate planning arrangements ahead of major changes to pension taxation due to take effect from April 2027.

Under the planned rules, unused pension pots are expected to fall within the scope of Inheritance Tax (IHT) for many estates.

Andrew Goddon, Partner and Head of Taxation Services at TWP, says this marks a major departure from the current position, where pensions have often been used as an efficient way to pass on wealth to the next generation.

“For years, pensions have been viewed as one of the more tax-efficient ways to pass on wealth to the next generations, as they are currently not subject to Inheritance Tax.

“A lot of estate plans have understandably been built around that assumption. However, these upcoming changes mean many families now need to revisit those arrangements to make sure the plans continue to work in their favour.”

The changes are expected to affect individuals with larger pension funds, property wealth and other investments, particularly those with pension savings deliberately preserved for inheritance purposes.

“We have clients who have drawn income from other assets during retirement, including personal savings or rental income, because they intended to leave their pension untouched for their family.

“Under the current rules, pension benefits can often be passed on free of Inheritance Tax and, where death occurs before age 75, beneficiaries can usually access those funds tax-free.

“Where death occurs after age 75, beneficiaries typically pay Income Tax on withdrawals at their own marginal rate. However, that approach may no longer produce the same outcome after April 2027.”

The Residence Nil-Rate Band (RNRB) remains available and continues to play a big role in estate planning.

The allowance can provide an additional threshold when passing a main residence to direct descendants, although tapering rules still apply for larger estates.

“For families intending to pass the family home to children or grandchildren, the Residence Nil-Rate Band is a key allowance to reduce the tax burden.

“Alongside the standard Nil-Rate Band, it can allow up to £500,000 of an individual’s estate to pass free of Inheritance Tax.

“Once pensions begin falling within the taxable estate from April 2027, some families could find themselves facing an Inheritance Tax liability for the first time and if they are not expecting this liability, it could create difficulties with funding the tax due.”

Andrew says early planning will be important for families, especially if they already have plans in place that could soon become outdated and not fit for purpose.

“There is still time to review beneficiary nominations, gifting plans, trust arrangements and how retirement income is being taken.

“The right approach will depend on personal circumstances, but waiting until the last minute rarely leaves people with the best range of options, so with less than 12 months left until the changes are set to come in, we are encouraging our clients to review their estate plans as soon as possible.

“We often find that Wills and estate plans put in place years ago simply have not kept pace with changes to tax legislation or family circumstances. A review can help identify gaps before they become expensive problems.”

To learn more about the changes to IHT on pension pots and solutions to reduce IHT liabilities, please contact us.