Six months remain until a major inheritance tax change, when most unused pension funds will be included in estate valuations from April 6, 2027. A tax and wealth planning specialist at Standard Life said this creates "the conditions for a perfect storm", against a backdrop of a frozen nil-rate band.
Frozen threshold and rising receipts
The Inheritance Tax (IHT) threshold has remained frozen at £325,000 since 2009, with 40% of the remaining cash paid to the Government if there is no spouse, civil partner, or qualifying charity to pass the estate on to. Neil Jones at Standard Life said this pulls more estates into the tax as inflation continues to push up the value of assets.
The threshold will remain frozen until April 2031, and annual receipts have been projected to rise from £8.7billion in 2025/26 to £14.5billion by 2030/31.
Impact on estates
The Government estimated that bringing pensions into a person's estate will affect a relatively small proportion of estates. Around 10,500 estates are expected to have an Inheritance Tax liability where they previously would not have, while approximately 38,500 estates are expected to pay more IHT than they would have previously.
But with six months to go until the pensions IHT change, Mr Jones has suggested five checks people should make now.
"Six months out from the pensions IHT change, preparations for affected clients will be well underway, with the focus shifting to reviewing updated plans and making any final adjustments.
"A significant amount of work has already taken place to prepare clients. Those reviews will have looked at areas such as how retirement income is taken, the role of alternative products such as bonds or trusts, and different approaches to passing on wealth, including gifting strategies.
"The next six months will be about refining plans rather than rushing into decisions that could have long-term consequences. Amid all the noise, it's important not to lose sight of the fact that pensions are designed to provide a sustainable income throughout retirement, and the majority of estates will remain unaffected by the change."
Five checks to make ahead of IHT change
Look at potential IHT exposure
Estate values and circumstances change, so he advised assessing the value of pensions alongside the wider estate and available allowances.
Stress-test the retirement income plan
"IHT is only one part of the picture. Check that the plan still provides the income and flexibility the client needs throughout retirement, including enough money for unexpected costs," he said.
Which assets are used, and when
The IHT change could affect long-standing assumptions about the order in which pension and non-pension assets are accessed. He recommended ensuring the existing approach remains appropriate.
How will wealth be passed on
Think about what they want the money will achieve and whether existing arrangements still support those goals. He said gifting, trusts and other estate-planning options may all form part of the conversation depending on individual circumstances.
Ensure pension admin is in good order
Make sure there is a clear record of pension arrangements and that plans are easy for others to understand. Multiple pension pots can create additional work for personal representatives, although he noted that consolidation won't always be the right answer and could mean giving up valuable features or guarantees.
