Many older people are being urged to take action now to avoid a potential inheritance tax (IHT) bill on their pension savings when new rules take effect in April 2027. Under the changes announced by Chancellor Rachel Reeves, unused money left in defined contribution pensions will be included in the value of an estate for IHT purposes, potentially pushing middle-income families into the tax net.
Currently, pension savings are normally exempt from IHT, but from 2027, any unspent pension pot that helps push an estate above the £325,000 threshold could be taxed at 40%. The exemption for spouses and civil partners remains, but other beneficiaries could face significant bills.
Financial advisers report a surge in clients taking steps to reduce their potential tax liability. Options include spending more pension money now, buying an annuity, or making use of gifting allowances. For example, individuals can give away up to £3,000 per tax year free of IHT, and this allowance can be carried forward one year.
Will Stevens, a partner at Killik & Co, says he has seen an increase in older people withdrawing pension cash to treat their families, such as funding holidays or meals out. However, experts warn that retirees must ensure they have enough income to support themselves in later years.
Annuity sales have soared as a way to reduce unused pension pots. A 65-year-old using £100,000 to buy a basic single life level annuity could secure an annual income of around £7,800. Meanwhile, gifting strategies are also popular, with many using the £3,000 annual exemption or making regular gifts from income.
Rachael Griffin at Quilter notes that IHT is now “firmly a middle-income issue,” while Nicholas Nesbitt at Forvis Mazars stresses that “the time for planning is now.” He advises clients to increase retirement spending and accelerate gifting to cut the tax bill.
