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As part of Pensions Awareness Week, we’re highlighting a big change that most people simply haven’t clocked yet: pensions are set to be brought into the value of your estate for inheritance tax (IHT) purposes.
For decades, one approach to retirement planning was to spend your taxable savings first, and leave your pension untouched for as long as possible. Because pensions generally sat outside your estate, they were one of the most tax-efficient ways to pass wealth on to the next generation.
That’s changing as of April 2027, meaning more families than ever before will start to face IHT bills. With rising house prices and frozen thresholds, IHT planning is no longer just for the wealthy. The good news is, there are measures you can take now to mitigate the impact of these changes.
As it stands now, any defined pension contribution funds that are unspent at the time of your death don’t form part of your estate for IHT purposes.
However, from 6 April 2027¹, most unused funds and death benefits will be included in your estate, making them subject to IHT of up to 40% above the nil-rate band. In addition, on or after this date at age 75 or over, beneficiaries may face both an IHT charge and Income Tax at their marginal rate when they withdraw the funds.
For many, these upcoming changes may not feel relevant or in need of action. But when you add your home, a growing pension pot, Workplace Pension savings, and maybe even a defined benefit scheme into the mix, many more estates are going to tip over the inheritance tax threshold.
Accessing funds is also a potential issue. When someone dies, their pension money isn’t necessarily sitting there ready to be paid out at the same speed as funds sitting in a bank account. Currently, you can access the pension funds fairly quickly, after April 2027 this will take a little more time as a result of the executor needing to ensure that the IHT tax that may be due is paid.
This may mean only a proportion of the funds paid out until this is concluded. Either way, if action isn’t taken ahead of time, families may be waiting for funds at exactly the moment they need to be paying a tax bill.
The time to act on this is now. But what can you actually do about it?
This is where Whole of Life Insurance comes in. Unlike Term Life Insurance, which is designed to cover a specific debt over a set number of years (such as a repayment mortgage), Whole of Life cover (also called Inheritance Tax Insurance) runs for as long as you live. Because it’s guaranteed to pay out eventually, it’s a suitable protection for a guaranteed liability: your inheritance tax bill.
Written into trust, a Whole of Life policy sits outside your estate, so the payout goes straight to your beneficiaries rather than being swallowed up by the very tax bill it’s meant to cover. For married couples and civil partners, a joint policy paid out on second death is usually the most cost-effective route, since that’s the point when inheritance tax is due.
Timing is everything. Whole of Life premiums are underwritten on your age and health at the point you apply, and only go up from there. Applying while you’re younger and healthier allows you to lock in a lower cost for cover that never expires (as long as you keep paying your premiums). If you wait too long, and develop any health conditions along the way, you may find yourself paying significantly more for the same amount of cover, if you’re accepted at all.
Rising house prices and pension wealth now falling into the IHT calculation means many more people are going to find themselves with an inheritance tax liability they didn’t expect. The sooner that’s identified, the more options there are: from gifting some of that wealth away during your lifetime, to living off other assets, to putting the right insurance in place. Doing nothing simply leaves the 40% tax bill to be found from somewhere, usually by your family, and usually at the worst possible time.
We can’t advise on your personal tax position, but we can help you understand what a Whole of Life policy could look like for your circumstances and put the most suitable protection in place. Get in touch with our team this Pensions Awareness Week to talk through your options. Call 02084327334, email help@drewberry.co.uk, or submit an enquiry to compare quotes and find out your options.
