British pension holders are being urged to take immediate action as the government confirms plans to extend inheritance tax to include retirement funds. Chancellor Rachel Reeves announced during last year's Autumn Budget that pensions will no longer be exempt from inheritance tax, marking a significant shift in retirement planning strategy.
What's Changing with Pension Inheritance Tax?
The proposed changes, outlined in a previous government consultation, mean that most unused pension funds and death benefits will be included within the value of a person's estate for inheritance tax purposes. This represents a fundamental departure from the long-standing tradition of pensions remaining outside inheritance tax calculations.
Chris Ball, CEO of Hoxton Wealth, has described the move as a "major shift" in how individuals need to approach their long-term financial planning. He emphasised that anyone likely to be affected should begin reviewing their arrangements immediately.
Key Steps to Prepare for the Changes
Financial experts recommend several crucial actions for pension holders:
- Review who you've named to inherit your pension
- Consider drawing down more during retirement rather than leaving large untouched pots
- Weigh up the use of other tax-efficient vehicles such as ISAs or lifetime gifting strategies
One critical document that requires immediate attention is the 'expression of wish and nomination' form. While not legally binding on pension providers, this document allows you to specify who should receive your pension if you haven't withdrawn from it, and providers typically consider these preferences when making distribution decisions.
Understanding the Financial Impact
Inheritance tax is currently charged at 40% on the total assets you leave behind when you pass away. Although there are various allowances enabling you to pass on up to £325,000 tax-free (plus an additional £175,000 if leaving your main residence to direct descendants), the new rules could significantly impact pension wealth transfer.
For example, if you had a £10,000 pension pot when you died and the entire amount was subject to inheritance tax, your beneficiaries would need to pay £4,000 in tax.
Mr Ball noted the understandable frustration among savers who have contributed for decades under the assumption that pensions would remain outside inheritance tax. He stated: "While Governments can change tax policy at any time, altering long-standing expectations always risks feeling unfair, particularly for those near retirement with limited scope to adjust."
The new rules are scheduled to take effect from the start of the 2027/2028 tax year beginning on April 6, 2027. However, Mr Ball suggested that "the April 2027 start date could theoretically slip if the policy detail isn't ready," indicating there might be some flexibility in the implementation timeline.
