Savers are being cautioned against a potentially “costly and irreversible mistake” as the Labour government’s inheritance tax changes approach. From April 2027, inherited pension funds will no longer be exempt from inheritance tax, a shift that could affect thousands of estates.
The government estimates that 10,500 estates will have an inheritance tax liability as a result of these changes, while around 38,500 estates will pay more inheritance tax than would previously have been the case. Inheritance tax thresholds will remain frozen until 2030, but the pension exemption removal marks a significant change in how retirement savings are treated after death.
Why consolidation carries risks
Experts warn that consolidating pension pots without careful consideration could prove deeply damaging. Alasdair Walker, of wealth planners Optimum Path, said there were “compelling reasons” not to combine pension pots. He cautioned: “You could be paying higher fees for 20 years or more. Some people could give up products with guaranteed annuity rates, potentially leaving them with less in retirement.”
Mr Walker added: “These irreversible choices could potentially cost tens of thousands of pounds throughout retirement.” The warning comes as savers consider whether to move their pensions ahead of the April 2027 rule change, which will bring inherited pension funds into the inheritance tax calculation.
Rising interest in consolidation
Andrew King, of Evelyn Partners, said enquiries about pension consolidation had risen since the inheritance tax changes were announced, but warned it was not the right move for everyone. “Consolidation could mean lose out on beneficial features like a protected lower retirement age, enhanced tax-free cash and beneficial features like guaranteed annuity and growth rates,” Mr King said.
Becky O'Connor, of PensionBee, described the transfer process as a “provider lottery” that already affected thousands of savers annually. She warned: “If more people are looking to consolidate ahead of the change next year, the burden on providers could increase, causing longer delays. Someone could have their financial affairs in perfect order, only to find their pension is stuck in transit when the rules change.”
Gifting and estate planning impact
Andy Shaw, of broker SPF Private Clients, told The Telegraph he had seen more inquiries from homeowners looking to gift money following the Government’s inheritance tax changes. “We expect this to continue as we move nearer to April 2027, when pensions are due to fall into the inheritance tax calculation,” he said.
“Most commonly, the funds released are gifted by the borrowers to their children or grandchildren, and will usually become a potentially exempt transfer, and thus fall outside of their estate after seven years,” Mr Shaw explained. The changes are part of a broader reform announced by the Labour government, with the threshold freeze extending to 2030 and the pension exemption removal set for April 2027.
