From April 2027, unused defined contribution pensions will for the first time fall within the scope of inheritance tax, under changes set to be introduced by Prime Minister Andy Burnham's Labour government. The policy, originally announced by former Chancellor Rachel Reeves, is causing households to rethink their retirement strategies and accelerate withdrawals.
New research from Hargreaves Lansdown, based on a survey of 300 people carried out by Opinium, reveals that one in four respondents intend to withdraw their pension tax-free cash and pass it on to family members as a way of shrinking their taxable estate. Additionally, over 25% indicated they would consult a financial adviser before making any decisions about how to respond to the looming policy shift.
Rethinking retirement plans
Before the change was announced, many people planned to spend down their other assets first and leave their pension for as long as possible, so it could be passed on to loved ones free of inheritance tax. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: "The change in the rules has since prompted people to think again and assess what can be done to reduce the value of the estate to save their family a tax bill."
The shift in strategy means individuals are considering gifting to loved ones while they are still alive, rather than relying on the pension as a tax-efficient inheritance vehicle. This approach not only potentially reduces the inheritance tax bill but also allows donors to see the benefit of their gifts during their lifetime.
Gifting strategies and caution
Morrissey noted that gifts could take various forms. "It could be a one-off amount towards a house deposit or wedding, for instance, or regular contributions into a Junior ISA to help someone afford university later down the line," she explained. However, she warned against giving away too much too quickly: "It's important not to give away too much, too quickly. This risks potentially running short of money further down the line, which can cause serious challenges."
The upcoming change has created urgency among savers, many of whom are now seeking professional advice. The survey indicates that over a quarter of respondents will consult an adviser, highlighting the complexity of the new rules and the need for careful planning.
Broader implications for retirement wealth
The inheritance tax extension to defined contribution pensions represents a significant shift in UK tax policy. Previously, such pensions could be passed on tax-free, making them a popular estate planning tool. From April 2027, they will be included in the value of the estate, potentially increasing tax liabilities for many families.
Financial experts recommend that individuals review their overall retirement and estate plans well in advance of the deadline. While withdrawing cash and gifting it can reduce the estate's value, it must be balanced against the need for sufficient retirement income. The decision to gift should be made with an understanding of the individual's long-term financial needs and the potential impact of gift rules, such as the seven-year rule for potentially exempt transfers.
As the April 2027 date approaches, further guidance from HMRC and financial institutions is expected. In the meantime, the research from Hargreaves Lansdown underscores a growing trend: households are taking proactive steps to protect their wealth from inheritance tax, even if it means altering their original retirement plans.
