This big pension rule change is just 6 months away and 74% don’t know about it. Do you?

Almost three-quarters of pension savers don’t know that a major change to pensions is coming, according to a study by Penfold.

That’s worrying when the rule change is a little over 6 months away from taking effect.

What’s changing?

From 6 April 2027, most unused pension funds and certain pension death benefits will – for the very first time – be counted when working out the value of someone’s ‘estate’ for Inheritance Tax purposes after they die. (Your ‘estate’ is everything you own – money, assets, and property.)

That is a significant change from the current rules because, previously, most unused pension savings have fallen outside of what’s considered someone’s estate when working out a potential Inheritance Tax (IHT) bill.

The survey from Penfold found that 74% of pension savers were unaware that change is a-foot. And if you haven’t realised change is coming, you can’t prepare for it.

So, if you’re hoping to leave your pension to your children, grandchildren or other loved ones, what should you do?

What to do now

If you have a pension that you hope to pass on to your family, don’t panic. We’ll help you understand what the new rules are and what you can do to prepare.

1. Understand the change

First things first – get clear on what this rule change means.

At the moment, most unused pension savings can be passed to your beneficiaries without Inheritance Tax getting involved. But that will change from 6 April 2027.

Under the new rules, most unused pension funds and pension death benefits will be included when calculating the value of your estate for IHT purposes. The change applies to most pension schemes, although there are some important exceptions (see below).

The government says the change is designed to remove what it sees as an incentive for people to use pensions primarily as a way of passing wealth to their families, rather than using them to fund their retirement.

In simple terms, if you die with money remaining in your pension, that money could form part of your estate for Inheritance Tax from next April onwards.

2. Discover whether you are affected

The government estimates that around 213,000 estates with inheritable pension wealth will exist in 2027/28. Of these, around 10,500 estates are expected to face an IHT bill where they would not have done so before, while around 38,500 estates are expected to pay more IHT than they would have under the current rules.

To work out whether you’re one of these affected, you’ll need to:

• (a)Get clear on what kind of pensions are included in this new law
• (b)Add up what your estate is worth

The government is trying to target as many pensions as possible with this new law, but there are some exceptions – cases where a pension will continue to be exempt from Inheritance Tax.

The exceptions to the rule are:

• Death-in-service benefits: If someone dies while still working and their workplace pension provides a separate death-in-service benefit, that benefit will not be swept into their estate for IHT under these new rules. This applies whether the scheme is ‘discretionary’ or ‘non-discretionary’.
• Benefits passing to a spouse or civil partner: If pension benefits pass to a surviving spouse or civil partner, they will be exempt from IHT.
• Benefits passing to registered charities.
• Some Defined Benefit pensions:

Defined Benefit (sometimes known as Final Salary Pensions or DB pensions) are more complicated. A DB pension isn’t necessarily a pot of money that you own and leave to your beneficiaries in the same way as a Defined Contribution (DC) pension. But sometimes, after death, the a DB pension provides a survivor’s pension or other death benefit to a named beneficiary. A regular survivor’s pension paid to a dependant — such as a spouse or civil partner — is generally excluded from the new IHT rules. However, some lump-sum death benefits could still be brought into the value of the estate.

If you want clarity on the rules surrounding DB pensions, I would strongly suggest speaking to an Independent Financial Adviser. We can help you find one here.

When you have established whether your pension is included or excluded under the new rules, you can calculate the total value of your estate. To do this, you’ll need to add up the total value of your home, savings, investments, valuables and any pension funds or death benefits that will be included under the new rules, then deduct any debts you owe. That is the current value of your estate.

Calculating how much Inheritance Tax will be due

Inheritance Tax is normally charged at 40% on the part of an estate above the tax-free threshold.

That standard tax-free threshold is currently £325,000. You may also get an extra £175,000 tax-free allowance if you leave your home to your children or grandchildren.

These new pension rules don’t mean that 40% of your pension will automatically disappear in tax. However, the value of your unused pension could now add onto what you might previously have calculated your estate to be worth. And, if you were under the threshold for tax before, that could push the overall value of your estate above the IHT threshold for the first time.

For those who already fall into IHT’s net, the government estimates an increase to those IHT bills of around £34,000 once pension assets are included.

The bottom line

Exactly how much tax could be due will depend on your specific circumstances, including which IHT allowances are available to you and who inherits your assets. The main message is if you’re worrying about this, or confused, speak to a Financial Adviser who can help.

While this change in the law is unlikely to affect most people’s estates, for people with larger pension pots and other valuable assets, it could make a significant difference to how much their families eventually inherit.

It could also to the administrative burden placed on those left behind, which makes having conversations with your loved ones, and planning ahead, all the more important for peace of mind and a smooth transfer of wealth.

Does this mean you should take money out of your pension?

Not necessarily.

The fact that pensions are becoming subject to IHT doesn’t automatically mean you should withdraw your money.

Pensions remain one of the most tax-efficient ways to save for retirement, and taking money out simply to avoid a potential future IHT bill could create other tax consequences or leave you with less money to live on in retirement.

The right decision will depend on your age, pension size, other assets, income, spending needs and who you want to benefit from your estate.

The important thing is to plan ahead. The earlier you know what your estate could look like, the more time you have to make informed decisions about your retirement and your family’s future.