The Autumn Budget in 2024 introduced significant changes to inheritance tax, including the future tax treatment of pensions. At the moment, unused pension funds aren’t usually counted as part of an estate for inheritance tax.

From 6 April 2027, most unused pension funds and death benefits may be subject to inheritance tax, meaning that pension assets over £325,000 (the current nil-rate band) could be taxed at the rate of 40%.

Extra allowances or exemptions may be available, including the residence nil-rate band. If the pension is left to a spouse or civil partner, it won’t be subject to inheritance tax when the first person dies. This is because spousal exemption still applies; this remains the same.

Probate and the role of Pension Scheme Administrators

From April 2027, pension scheme administrators will take on a new role: they’ll be responsible for reporting and paying inheritance tax on unused pension funds and death benefits.

The personal representatives of the estate currently have this role, but only for certain types of pension schemes that are part of the estate’s value.

To report the tax correctly, pension scheme administrators will need to know how much of the deceased’s inheritance tax-free allowance (nil-rate band) applies to their unused pension funds. Personal representatives will have to work this out and give this information to the pension scheme administrators.

These changes may cause delays in paying inheritance tax (which is due within six months of death) and in passing on pension funds and other estate assets to beneficiaries.

That’s why it’s important to plan ahead and be ready for these new rules to avoid extra delays and complications.

The impact of the changes – estate planning

Previously, pensions were considered a ‘safe space’ as they were outside the scope of inheritance tax. In light of the new rules, you may need to reconsider how you plan your estate to help reduce your inheritance tax liabilities.

Lifetime gifting

It is important to balance the benefits of gifting with ensuring adequate resources for retirement. Lifetime gifting may include the following:

• Making use of your annual gift allowance (£3,000 per tax year). Gifts are not included in the value of your estate.
• Being aware of the seven-year rule, which allows unlimited gifts to be made provided you live for seven years. This reduces the overall value of your estate.
• Setting up a trust, which can move assets out of your estate.
• Charitable giving – donations to charity are tax free. If 10% or more of your estate is left to charity in your will, your inheritance rate may also be reduced.

Life insurance

• It is possible for life insurance policies to be written into trust, which can help pay inheritance tax and also create wealth that isn’t taxed under inheritance tax. This is especially helpful for people with large pensions or extra income.
• Since there may be longer delays in accessing pension funds after someone dies, the quick pay out from life insurance could become an even more important part of estate planning.

Review and update pension nominations

• Keep your nominations up-to-date to ensure funds are passed efficiently.
• From April 2027, consider nominating your spouse to ensure they would benefit from spousal exemption for your pension’s death benefits if you die before them.

Pension drawdown strategies

• If your pension is large, one option might be to take money out gradually and use it for tax-efficient gifts or to invest in assets that are free from inheritance tax. Talk to a TEP qualified practitioner first to understand the tax implications before doing this.

The Autumn Budget 2024’s reforms are making significant changes to the tax treatment of pensions. Given the complexity of the changes, working closely with professional advisors who specialise in estate planning is key to optimising inheritance tax planning and protecting wealth for future generations. Look for someone who is STEP qualified as this means they specialise in this particular area.

Nina Sperring TEP, Partner, Price Slater Gawne Solicitors